The US dollar is maintaining its strong position in foreign exchange markets, driven by hot inflation data and expectations of aggressive Federal Reserve policy tightening. Short-dated US yields have surged by nearly 40 basis points since Tuesday, following hawkish comments from Fed official Christopher Waller, who suggested a 50 basis point hike in December. Markets now anticipate back-to-back rate hikes in December and January, with a total of 85 basis points of tightening in the cycle.
The dollar's strength is particularly evident against low-yielding currencies like the Swiss franc and the yen. USD/CHF is testing the key resistance level of 0.8400, while USD/JPY has breached the psychological 160 mark. The dollar is also expected to gain against activity-sensitive currencies, such as the Swedish krona. Today's US Producer Price Index (PPI) data is likely to reinforce the narrative of persistent inflation, with components like healthcare, airfares, and software feeding into the Fed's preferred PCE inflation measure.
The Euro is struggling to keep up with the dollar's rally, as the European Central Bank's rhetoric points to a December rate hike but lacks the conviction of the Fed's tightening cycle. EUR/USD is under pressure, with the pair at risk of breaking below 1.10 into year-end. Today's focus includes the second release of eurozone GDP data for the third quarter and several ECB speaker events, all likely to emphasize a December rate hike.
In Central and Eastern Europe, regional currencies remain under pressure due to surging energy prices and a weaker EUR/USD pair. Key data releases include GDP figures for Romania and Poland, Turkey's inflation expectations, and the Czech National Bank's meeting minutes. The Brazilian real has also weakened post-election, but fiscal consolidation efforts by President Lula's government may provide some support.