FX Daily: Spotlight on US inflation expectations today


Strong DXY and weak EUR at technical cross-roads
Philip Wee12 Nov 2021
    Photo credit: Unsplash Photo


    In line with the higher US CPI inflation report on Wednesday, US inflation expectations might surprise on the upside in the University of Michigan Survey of Consumers today. According to consensus, consumers expect inflation over the next 12 months to be higher at 4.9% in November vs 4.8% in October. The last survey noted that high savings from pandemic cash incentives and President Joe Biden’s social support programs have led consumers to become less resistant to the willingness of sellers to hike prices on shortages in supply and labor. As more households anticipate real incomes to decline, there is a need to watch for a tipping point where corporate pricing power reins in consumer purchasing power. The spike in inflation expectations this year is the first outside of a US recession. Based on the experiences of the Volcker years, it might require high interest rates and more than one recession to realign expectations. 

    New York Fed President John Williams will be speaking after the UoM survey release.However, no one will be interested in the discussion around “Heterogeneity in Macroeconomics” at the event hosted by his bank. Instead, the market wants to assess how much his transitory inflation stance has swayed after Tuesday’s shockingly high CPI reading above 6% YoY. We suspect not much and that it will close to that of Mary Daly, his successor at the San Francisco Fed. While Williams is not expected to join St Louis Fed James Bullard in calling for two hikes in 2022, he might support Vice Chair Richard Clarida’s optimism for the Fed’s three conditions (inflation, unemployment rate and GDP growth) for lifting rates to be met by end-2022. 

    DXY closed above 95 for the first time since July 2020. To extend the USD’s uptrend next week, DXY needs to close this week above its trendline resistance around 95.3. But the bounce from 94.0 to 95.2 has been sharpest in the past two days ahead of the weekend. Moreover, the DXY’s dominant component, EUR, will need to punch through a major support level too. 



    EUR closed below 1.15 and returned more than 50% of its pandemic gains. Yesterday’s close of 1.1450 was the lowest since May 2020 and a trendline support that coincided with the high of the Covid outbreak in March 2000. EUR needs to break this level to extend its fall to 1.1315 or its 61.8% Fibonacci retracement level. EUR could not appreciate against the USD for the same reason the European Commission’s upgraded forecasts for the Eurozone economy could not topple US inflation fears. The autumn forecast for real GDP growth was lifted to 5.0% from the 4.8% projected in summer. However, 2022 growth was revised down to 4.3% from 4.5% and 2023 left at 2.4%. Inflation in 2021 is projected to be below the US at 2.4% in 2021, and slow to 2.2% in 2022 and 1.4% in 2023. Speaking today at an EC event, European Central Bank Chief Economist Philip Lane is likely to reaffirm that the ECB will lag the Fed in normalizing monetary policy.





    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]



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