US Dollar: Risks Skew to Downside Ahead of Key Inflation Report - What's Next?
Despite the somewhat dovish stance of Fed members causing a surge in risk assets last week, the US dollar index also experienced a partial uptick, reaching a peak near 106. After facing resistance at this level, the greenback stalled as investors switched to a cautious stance ahead of the upcoming US inflation data release.
Post market closure on Friday, international credit rating agency Moody's downgraded the country's credit rating outlook from stable to negative, citing heightened downside risks to US fiscal strength, which resulted in a partial rise in long-term US bonds. Moody's predicts that the US fiscal deficit will persist at elevated levels, and debt solvency could weaken significantly without effective fiscal policy measures to reduce government spending and boost revenue, especially with prevailing high-interest rates.
In spite of these developments, inflation remains a focal point for the market. The Fed continues to caution that any deterioration in the downward trend in inflation and robust growth data might prompt a return to interest rate hikes. The juxtaposition of financial strain due to high financing costs and the Fed's resolute stance against inflation underscores the critical importance of the forthcoming inflation data.
Tomorrow, October's US inflation data is set ticker lower from 3.7% to 3.3% YoY, while core inflation is anticipated to remain steady at 4.1%. Recent US data reveals signs of economic activity weakening in the country, aligning with the expectation of a sustained downward trend in inflation. Consequently, if the Consumer Price Index (CPI) data aligns with or falls below expectations, it may boost risk appetite and alleviate pressure on the Fed.
Conversely, a deviation from
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