Strong USD momentum ahead of US CPI report

USD: CPI in focus but momentum favours the dollar

The US dollar has advanced further with momentum and technicals helping to reinforce the move on a day when there was not much in the way of macro or new political news from Florida that might have added to the strength of the dollar. The DXY on a daily closing basis broke above trend-line resistance from the highs October and November 2023 and April and June this year. All of those highs are in sight (between 106-107) and a break of those highs would take DXY to levels not seen since Q4 2022. GBP/USD was the biggest mover yesterday with GBP underperformance reinforced again from technicals with GBP/USD breaking below the 200-day moving average at 1.2819 yesterday. Overnight we have had confirmation from President-elect Trump that Elon Musk and Vivek Ramaswamy will head up a new Department of Government Efficiency (DOGE) that will focus on cutting costs and waste with Musk aiming to slash USD 2trn. Such massive cuts would fuel a sharp spike in job losses and would be deflationary but this estimate lacks credibility given government spending last year totalled USD 6.75trn. It would imply cutting all discretionary spending (which includes defense) and a portion of mandatory spending on social benefits. The job losses involved in cutting costs in government departments would likely be too much for the Trump administration to fathom. The dollar did get a lift from reported speculation that Robert Lighthizer is pushing for an aggressive start to tariffs and that an Executive Order on tariffs could be signed by Trump on day one in office.

Today we will see some shift away from politics with the key CPI data released in the US. The October CPI is expected to reveal another 0.3% m/m increase in core CPI which will see the y/y rate remain unchanged at 3.3%. The headline m/m rate is expected to increase 0.2% with the y/y rate increasing from 2.4% to 2.6%. Softer energy prices will help contain the headline rate. The key to any surprise in either direction is likely to be in the rents sector and there has been better signs of easing inflationary pressures. Rent of shelter slowed from 0.5% to 0.2% in September and good news again in this sector would likely see a downside surprise print.

A consensus print will certainly keep the Fed in play for cutting rates again in December. The OIS market currently implies a 50% probability of a cut. Minneapolis Fed President Kashkari stated yesterday that an upside surprise in inflation data between now and the FOMC could be enough to prompt a pause and that is likely to be the consistent message – the Fed is focused on the data and not politics and not second-guessing what Trump might or might not do in the White House. Given that position, the FOMC may well be encouraged to cut now given policy announcements made after inauguration may make it more difficult to ease immediately after.

Given the momentum and technicals are reinforcing the strengthening of the US dollar we would argue that there’s a bias to market reaction today to the upside. A stronger inflation report could derail a December cut and this will only serve to reinforce the demand for the dollar. A weaker CPI print today will make a December cut more likely but market participants will be less enthusiastic to position for that at this point given the increased inflation concerns since the election. We have revised our forecasts for the US dollar significantly higher following the US election (click here).         

FED RATE CUTS HAVE BEEN PARED BACK AS THE US DOLLAR SURGES

Source: Bloomberg, Macrobond & MUFG GMR

EUR: German election date set

The possible long period of a power vacuum in German politics has been cut shorter after a deal was reached between Chancellor Scholz and the SPDs and Friedrich Merz and the CDUs to hold a general election earlier. A confidence motion in the government will be submitted to the Bundestag on 16th December with the expected loss then triggering an election on 23rd February. Anything that brings forward the end to this power vacuum is good news and the centre-right CDU coming to power would herald a greater prospect of more business-friendly policies that will be a key part of trying to revive Germany’s economy. It’s badly needed and the ZEW Survey of Current Conditions index yesterday fell from -86.9 to -91.4 in November, the worst reading since the worst point during the covid pandemic in 2020 and similar to the levels at the worst point of the Global Financial Crisis back in 2009.

Market participants will now be watching the opinion polls closely. According to Politpro.eu, the CDU/CSU is currently polling at 32.8% with the AfD polling next best at 18.0% with the SPD on 15.8%. The Greens are on 11.4%, BSW is on 6.8% and FPD is polling at 4.1% - less than the 5% threshold for being permitted to enter parliament. AfD support has bounced a touch in recent polls as has the support for CDU/CSU. As can be seen above, since the last election it is only the CDU/CSU and the AfD that have made gains with all other parties losing support. The most likely outcome at this juncture seems to be a CDU/CSU led coalition with the SPD. Currently, combined these parties are polling 48.6% so could feasibly be in a position to hold power. However, the better the parties on the extreme left or right do (BSW / AfD) then the more likely the CDU/CSU will require the support of the Greens or the FPD (if it achieves 5%). If CDU support is to pick up in the polls this would be greeted well by the financial markets and all else equal would be supportive for the euro.

Of course, all else will not be equal and the US side of EUR/USD will likely continue to dominate. It is certainly not ideal to have no effectively running government in Germany in the upcoming period. The aftermath of the German election could mean a long period of negotiations at a time when Trump is announcing sizeable tariffs that could impact Germany more than many other euro-zone countries. So again, in that regard a strong showing for the CDU that speeds up the process of coalition negotiations would be good for the euro.

CDU/CSU WELL PLACED TO LEAD A NEW COALITION GOVERNMENT

Source: Politpro.eu

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	09:45	BoE MPC Member Mann speaks	--	--	--	!!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-10.8%	!
US	13:30	Core CPI (MoM)	Oct	0.3%	0.3%	!!!!
US	13:30	Core CPI (YoY)	Oct	3.3%	3.3%	!!!
US	13:30	CPI (YoY)	Oct	2.6%	2.4%	!!!
US	13:30	CPI (MoM)	Oct	0.2%	0.2%	!!!!
US	13:30	FOMC Member Kashkari Speaks	--	--	--	!!
US	13:30	Real Earnings (MoM)	Oct	--	-0.1%	!
US	14:30	FOMC Member Williams Speaks	--	--	--	!!
US	14:35	Fed's Logan Speaks	--	--	--	!
US	16:00	Cleveland CPI (MoM)	Oct	--	0.3%	!
US	17:00	EIA Short-Term Energy Outlook	--	--	--	!!
US	18:30	Fed's Schmid Speaks	--	--	--	!
US	19:00	Federal Budget Balance	Oct	-226.4B	64.0B	!!
AU	23:00	RBA Gov Bullock Speaks	--	--	--	!

Source: Bloomberg