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]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. 

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.