USD: inflation matters

The US midterm elections dominated the price action in the USD at the start of the
week. While some results are still to be called, the midterms have highlighted the
growing prospects for a political gridlock in DC that could curtail the US
government’s ability to implement aggressive fiscal stimulus should the economic
conditions deteriorate from here. This further adds conviction to the view that the
Fed could turn more dovish during the course of 2023 as both the US economy
and inflation start slowing down. In turn, this corroborates our expectation for a
peak in the USD in the coming months. That being said, with the US economy still
holding up reasonably well and US inflation still uncomfortably high, the Fed will
likely remain laser-focused on bringing inflation under control. This should continue
to boost the rate appeal of the USD and, to the extent that tighter global financial
conditions weigh on risk sentiment, its safe-haven appeal too. On the day, focus
will be on the US CPI data for the month of October. Ahead of the release, our US
economist is looking for headline inflation to remain above 8%YoY (vs consensus
for 7.9%) and the annual core print to be little changed at 6.6% (vs consensus of
6.5%). The USD reaction to any positive inflation surprises today would depend on
the price action in the US fixed income market in the wake of the data. To the extent
that today’s inflation data reinvigorates the recent rally in UST yields and US rates,
the high-yielding, safe haven USD could regain some lost ground.

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