US CPI numbers suprised to the upside yesterday. While the CPI YoY figure was just 0.2% higher than expected (8.3% vs. 8.1% cons) the strong Dollar buying was probably fueld in particular by the rise in the Core CPI number which came in twice as high as originally expected (0.6% vs. 0.3% cons). With that, inflation has arrived in the middle of the economy.
75 basis points (bp) are almost a certainty next week Wednesday, but there are also market participants who see an even bigger 100 bp move. Of course, the FED has to keep hiking until inflation calms down but I do not think that the FED feels compelled to rush any further. Because in addition to interest rates, the FED has another important task ahead of it: reducing its balance sheet. And extreme jumps in the key interest rate are likely to make any balance sheet reduction even more difficult.
(source: FED)
So far, at least, the FED has done almost nothing at all. Its balance sheet is still higher than at the beginning of the year. If you check the link, you will find another graphic over a longer period of time. The increase between Covid 2020 and the end of 2021 was extreme and I have no idea how the Fed would ever want to reduce the last 2 years alone.
With that in mind, I wonder if the past Dollar rally might not have been overdone. Yes, on the one hand the FED is hiking constantly and obviously outpacing its G1o central bank peers for the time being. But on the other hand I cannot see real efforts to expose their asset holdings to competitive conditions. In this respect, the FED is still trying to achieve a soft landing. And I am just wondering if a soft landing and a strong Dollar go together.
(source: fxstreet.com)
Nonetheless you have to accept the market. As long as the Dollar-Index (DXY) is trading above the 109.30 treshold you have to watch any Dollar shorts carefully. There are still seven trading days left until the FOMC meeting and the FED members are on mute. Volatility will therefore remain high for the time being, but certainly also offers opportunities.
Good luck,
Sebbo