The US Consumer Price Index (CPI) is anticipated to rise 3.1% year-on-year in November, slightly exceeding September’s levels. This increase, along with the core CPI inflation prediction of 3%, reflects higher energy prices, according to analysts.
The Bureau of Labor Statistics will release the CPI data on Thursday, without monthly figures due to a government shutdown, leading to an emphasis on annual data. The inflation report could influence predictions regarding Federal Reserve rate cuts and affect US Dollar valuations.
Federal Reserve Rate Cut Projections
There’s a 20% chance of a January Fed rate cut, as indicated by the CME FedWatch Tool. Recent employment figures revealed a decline in Nonfarm Payrolls by 105,000 in October, with a modest rise of 64,000 in November, along with an increased Unemployment Rate to 4.6%.
The mixed job data does not seem to alter policy outlooks significantly. A rise in CPI to 3.3% or higher might maintain current Fed policy and strengthen the US Dollar. Conversely, if inflation drops to 2.8% or less, it might lead to a rate cut, potentially weakening the Dollar.
The technical outlook suggests a bearish trend for the US Dollar Index, though indicators show a loss of negative momentum. The RSI on the daily chart indicates a recovery, with potential resistance and support levels defined by Fibonacci retracement points.
November Inflation and Its Implications
We have now seen the November inflation data, and it came in hotter than the market anticipated at 3.3% year-over-year. Core inflation also proved sticky at 3.1%, challenging the narrative of rapid disinflation. Following this report, the probability of a January rate cut, as priced by the markets, has fallen sharply from around 20% to below 10%.
This inflationary pressure is supported by other recent figures, with November’s retail sales showing surprising strength and consumer sentiment for early December jumping significantly. While the jobs report was mixed due to the government shutdown we saw in the fall, the underlying resilience of the consumer suggests the Federal Reserve has little reason to rush into easing policy. We must remember that Atlanta Fed President Bostic recently highlighted that firms remain determined to protect their margins.
For derivative traders, this reinforces a bullish outlook for the US Dollar in the near term. The prospect of interest rates remaining higher for longer should support the dollar against other major currencies. Consequently, we are likely to see increased demand for call options on the US Dollar Index (DXY) and a rise in implied volatility on currency pairs like EUR/USD and GBP/USD.
We should consider positions that benefit from a hawkish Fed, such as buying puts on Treasury note futures, anticipating that yields will remain elevated or climb further. Looking at the DXY, the index has now decisively reclaimed the 98.60 level, which was the 100-day moving average. The next key test will be the resistance zone around 98.85, making it a viable target for short-term bullish strategies.
This environment is decidedly negative for non-yielding assets like Gold. As we have seen historically, such as during the tightening cycle of 2022, higher real interest rates increase the opportunity cost of holding gold, and we can expect further pressure on its price. Derivative plays could involve buying puts on gold futures or selling call spreads to capitalize on a potential move back toward recent lows.
