Trade-weighted measures of the dollar have rallied around 7% this year. The bulk of those gains came in the second half of the year driven by the change in expectations for Fed policy. Having pitched a story that rates would be left unchanged until 2024 such that inflation could catch up for prior undershoots, the June and then the September Dot Plots suggested that the Fed was shifting to a more conventional tightening cycle.
Today's communication from the Fed will be so important for the dollar. New Dot Plots that show a Fed median expectation of two hikes in 2022 will very much support the notion of the Fed moving into tightening mode and there will be plenty of interest as to how the Fed now refers to inflation. Today's Fed meeting should be the catalyst for an upside breakout.
Ahead of the Fed, Congress has agreed to raise the debt ceiling and we should see a good US November retail sales release as well. Put together, analysts are expecting a strong reaction to a bullish Fed this afternoon.
Expectations for a hawkish Fed, softer commodity prices and weak risk appetite are combining to keep the CAD weaker. The CAD remains one of the most sensitive currencies market volatility among the majors which suggests the loonie will struggle to make any headway despite solid fundamentals of growth and central bank prospects. The loonie is in for a wild ride today with the Fed announcement and could potentially see the USD/CAD rally toward 1.30.
EUR/USD will be driven by the Fed story today. However, leaked reports suggest that the new European Central Bank CPI forecasts to be released tomorrow will show inflation dropping back under 2% in 2023 and 2024 - giving the ECB plenty of room to keep all its options open. That should be the core story of tomorrow's ECB meeting and offer the EUR little protection against a stronger dollar. If today's Fed is as hawkish as we expect, EUR/USD should press the 1.1170/80 area later today, with a close below opening the door to 1.10.
The UK November CPI was released this morning at a whopping 5.1% YoY clip. Most analysts had not thought that CPI would peak until April (at 5%). To add fuel to the fire, European gas prices have broken to new highs this week - which will give the Bank of England a real headache over whether to hike or not. Given the BoE has positioned itself in a ready-to-move policy stance, the current trend may bring forward rate hike discussions earlier.
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