Dollar Has Fresh Highs in Sight as Inflation Data Should Confirm Fed Jumbo Hike

By Yasin Ebrahim

Investing.com -- The dollar could mount a move toward fresh highs for the year as inflation data set for later this week showing that core inflation likely remains on the up and up should all but confirm the prospect for another jumbo-sized rate hike next month.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.36% to 113.08 to move closer to its 52-week high of 114.75.

“The late-September dollar highs are well within reach,” ING says, as Thursday’s inflation data for September “should all but endorse prospects of another 75bp rate hike in November.”

81% of the traders expect the Fed to raise rates by 75 basis points, according to Investing.com’s Fed Rate Monitor Tool, marking the fourth time the central bank has lifted rates by that size in as many months.

U.S. Consumer Price Index data is expected to show headline inflation slowing to 8.1% from 8.3% in the 12 months through September.

But core inflation, which excludes food and energy prices, and is closely monitored by the Fed as a more indicative measure of underlying price pressures, is expected to rise to 6.5% from 6.3%.

Fed commentary this week, meanwhile, has also tipped the hawkish scales of monetary policy in the greenback’s favor as Fed vice chair Lael Brainard hinted that the central bank would remain on mission – to bring inflation down – despite a deteriorating growth outlook.

“I now expect that the second-half rebound will be limited, and that real GDP growth will be essentially flat this year,” Brainard said in a speech Monday, citing the impact of a “significant increase in interest rates.”

The fed vice chief, however, hinted that the Fed’s job to bring demand down isn’t close to running out of road.

Robust labor demand continues to support strong wage growth, and coupled with high rental and housing costs, “inflation from core services is expected to ease only slowly from currently elevated levels,” Brainard added.

The remarks echoed that of Fed chair Jerome Powell who has repeatedly stressed the need to push interest rates into restrictive territory sooner rather than later at the expense of economic growth.

“I think you're starting to see trends of an economy slowing but not enough to change Powell’s conviction,” Robert Conzo, CEO of The Wealth Alliance told Investing.com in an interview on Friday. “He is focused on raising rates to break the back of inflation.”

Further commentary from Fed members in the coming days on the need for the central bank to continue front-loading of the rate hikes will push out bets on where Fed rate hikes will peak, potentially providing the dollar with further ammo to advance.

“A 75bp hike for November and a 4.60-4.70% peak rate are now in the price, but additional hawkish comments – if backed by an inflation surprise for example – could encourage markets to speculate on larger hikes or a more prolonged tightening cycle,” said ING in a note.