Traders are now largely predicting that the Fed will raise rates by 50 basis points in December. But the balance of risks is starting to point towards a downside. As the dollar recoups some of the gains it made earlier this year, investors are moving into riskier assets. This can lead to further declines in the DXY index.
The US dollar fell on Thursday after October consumer prices were lower than expected. The October rate slowed to 7.7% y-o-y, below the 8% forecast and the slowest rate since January. But lower inflation is a positive for borrowers and could help the Fed scale back its interest rate hikes. The decline may also signal that underlying inflation is cooling. Inflation could also be impacted by the Russian invasion of Ukraine, which sparked a shortage of food staples across the world.
Private-sector business activity in the services sector fell in August, the second straight month of contracting activity. This was partly due to tighter financial conditions and more restrictive monetary policy. In the third quarter, the economy grew faster than expected, suggesting a gradual recovery. But concerns about slowing growth continued to build, fueled by warnings from growth companies and gloomy earnings.
Consumer prices rose 0.3% month over month, excluding the volatile food and energy components. The core CPI, which excludes food and energy costs, increased 6.3% on an annual basis. However, the headline CPI rose less than expected, rising 0.7 percent. This slowdown in inflation tempered expectations that the Fed would raise rates by another 75 basis points in December.
The Fed has been criticized for slowing its rate hikes. This is a key issue, especially when the Fed has a lot of data to report in the coming weeks. Some analysts believe the Fed needs to slow its rate hikes to give the economy time to heal. The Federal Reserve has raised rates by three quarters of a percentage point in the third and fourth quarters. The ECB has also been slow to act. The euro fell to fresh 20-year lows against the dollar in September. This puts the euro in a challenging position against the dollar, as it is very dependent on Russian energy.
The dollar index has risen 12% this year against a basket of major currencies. The Fed is determined to bring inflation back to its target level through higher interest rates. However, the Fed’s actions have largely been slower than the ECB, which has boosted its rates by 200 basis points this year.
The Fed has taken some hints about tapering its stimulus this month, but it will be a few more months before the Fed actually announces it. The Fed will also likely wait until August to signal that it will slow its purchases. It is possible that one report will put a ceiling on bond yields. Traders have also begun to assign more than 80% probability that a 50-basis point rate hike will take place in December