USD: Inflation’s Persistent Heat

The DXY dollar index has surged to 2022 highs, fueled by a fresh wave of post-election trades favoring a stronger dollar. The narrative centers around a widening rate and growth divide between the U.S. and other developed nations. On the government front, Elon Musk and Vivek Ramaswamy have been tapped to spearhead a “department of government efficiency,” targeting reduced bureaucracy and spending. Musk’s role hints at potential deregulation and lighter tax policies under the Trump administration, although it remains to be seen how this will affect fiscal policy.

The dollar’s strength appears to reflect much of Trump’s policy outlook, with opportunities to capitalize on this strength through data releases and dovish Fed signals. Today’s U.S. inflation report is expected to show a 0.3% MoM rise in core CPI and a 0.2% increase in headline CPI for October. This level surpasses the 0.17% MoM rate needed for the Fed’s 2% target, suggesting a dovish lean in market expectations for Fed policy.

Currently, market expectations for Fed easing are moderate, with only 15bp priced for December and 23bp for January. This cautious stance suggests the dollar could face downside risk if core CPI falls below expectations. Notably, several Fed speakers, including Kashkari and Williams, could provide insights today. If CPI meets expectations, the dollar rally may extend, with DXY holding above 106. However, the strong dollar move appears stretched, raising the potential for a positioning-led USD pullback similar to November 7.

EUR: 1.06 Reflects Rate Differential

EUR/USD has struggled under U.S. dollar strength and could fall below 1.06 today if U.S. core CPI aligns with forecasts. Although EUR/USD’s recent drop may seem severe, a 1.060 level aligns with short-term rate differentials, as the USD two-year swap rate gap has widened to about 185bp. This suggests that EUR/USD is aligned with rate expectations, reflecting beliefs that the ECB will cut rates more than the Fed, especially as tariff impacts loom over growth.

We support a dovish outlook for the ECB, with market pricing underestimating a potential 50bp cut in December by 30bp. With no significant eurozone events today, U.S. data will largely drive EUR/USD. While a short-term upward correction is possible, today’s likely strong U.S. CPI keeps our outlook bearish for EUR/USD, targeting 1.04 by year-end.

GBP: Spotlight on Catherine Mann

Today’s key event for sterling is a speech by the Bank of England’s Catherine Mann, known for her hawkish stance on the MPC. Markets will be alert for comments on recent budget implications and insights on jobs and wages data. Given her approach, Mann may focus on inflationary risks tied to the government’s spending plans and potentially underscore wage growth over rising unemployment.

With markets currently discounting a December rate cut and limited easing through September 2025, the sterling outlook skews dovish. A re-evaluation toward dovishness could weigh on GBP, although markets may move cautiously, especially given the budget’s inflationary considerations. The euro’s softness suggests EUR/GBP may hover around 0.8300.