US CPI and FOMC meeting could trigger a USD short squeeze heading into year end – MUFG

The week ahead is expected to be pivotal for USD performance through the rest of this year with the release of the latest US Consumer Price Index (CPI) report and final FOMC meeting of this year. Economists at MUFG Bank highlight the risk of USD short squeeze in week ahead. 

Bearish USD trend set to be stress tested

“Market participants are anticipating further confirmation that underlying inflation pressures (+0.3% MoM expected in November) are beginning to ease from an elevated starting point, which if confirmed should keep the USD on a softer footing heading into year end. On this occasion though an upside inflation surprise poses a greater risk of a bigger market reaction after the sharp weakening of the USD over the past month.”

“The Fed has been clear that it plans to deliver a smaller 50 bps hike. USD performance will be driven mainly by: i) whether Chair Powell signals clearly that another step down in the pace of hikes is likely at the next FOMC meeting posing downside risks for the USD, and/or ii) whether the Fed signals that the policy rate will need to be raised to a higher peak above 5.0% in 2023 and remain higher for longer in 2024 posing upside risks for the USD.”