Gains for the Dollar as American Inflation Rises as Expected

Annual headline inflation for November was widely expected to have risen, but this seems to confirm that the Federal Reserve (‘the Fed’) might be less dovish early next year. This article summarises recent news and data affecting the US dollar then looks briefly at the charts of EURUSD and GBPUSD.

Recent releases of inflation from the USA have bucked the overall downtrend, but it might be too early to call this a new trend of rising inflation:

The rate has risen in the last two months, but it hasn’t been a significant resurgence, remaining below 3%, and inflation is still significantly below the target for the funds rate. Annual core inflation at 3.3% on 11 December was also in line with the consensus.

The Fed has repeatedly stressed its focus on not cutting rates too quickly to avoid a resurgence of inflation. About 97% of participants are currently pricing in a single cut by the Fed on Wednesday 18 December. However, how the Fed moves in January is key, with no overwhelming consensus yet.

At the time of writing, only around 21% of participants expect another cut on 29 January. A pause then would be an important signal of intent and probably serve to support the dollar while challenging gold.

The Fed has avoided addressing directly the economic implications of the incoming Republican government, but it seems clear that new, higher tariffs would be inflationary to some degree. Donald Trump or other senior members of government are unlikely to be successful in pressuring the Fed to loosen policy, especially not if inflation increases while job data worsen.

Apart from the Fed’s meeting on 18 December, traders are also looking ahead to final GDP for the third quarter the next day and personal consumption expenditures (‘PCE’) – the Fed’s preferred measure of inflation – on 20 December. PCE could have an effect on expectations for January’s meeting, especially if the result is surprising.

Euro-dollar Struggles to Find Direction

Traders have mostly discounted the latest single cut by the European Central Bank (‘the ECB’) since that was widely expected and the comments in the subsequent press conference didn’t give any significant new information. Inflation has also risen in the eurozone in the last two months but hasn’t reached as high as in the USA. The difference in rates between the ECB and the Fed is likely to remain at least 1% for the foreseeable future.

After a bounce at the end of November following the failed test of $1.04, euro-dollar hasn’t shown ongoing momentum upward. It might now fall into a sideways trend with a range between around $1.04 and $1.06. Most indicators are close to neutral in the shorter term but the main downtrend active in October and November could reassert itself depending on the reaction to the Fed’s meeting and, to a lesser extent, PCE and GDP.

Cable Turns South After Weaker British Data

British data on Friday 13 December were pretty roundly disappointing: monthly GDP for October, industry and manufacturing all contracted against expectations for growth. Current estimates suggest that the Bank of England (‘the BoE’) will hold rates on 19 December and cut only three times in 2025, so it’s moderately likely that the BoE will remain at least one step higher than the Fed until next summer.

It’s possibly questionable whether 13 December’s reaction to the data was justified, since overall fundamentals for cable seem to be stronger than for euro-dollar. The volume of selling hasn’t increased significantly in recent days, so the price might need to bounce slightly before another serious attempt on $1.25 or lower.

The upside seems to be limited, though: $1.28 looks like an important resistance and the price is very close to overbought based on the slow stochastic. Volatility and volume will probably remain subdued until the central bank’s meetings, but from 18 December they’re likely to increase sharply. The next direction might become clearer then as the dust settles after banks’ news on consecutive days.

This article was submitted by Michael Stark, an analyst at ExnessExness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.