The US Consumer Price Index (CPI) is expected to rise by 3.1% year-on-year in November, slightly higher than September’s figures. Analysts attribute this increase, along with a core CPI inflation estimate of 3%, to rising energy prices. The Bureau of Labor Statistics will announce the CPI data on Thursday. Due to a government shutdown, monthly numbers will not be available, so the focus will be on the annual data. This inflation report may impact expectations for Federal Reserve rate cuts and the value of the US Dollar.

Federal Reserve Rate Cut Expectations

The chances of a Fed rate cut in January are currently estimated at 20%, according to the CME FedWatch Tool. Recent job data revealed a decrease of 105,000 in Nonfarm Payrolls for October, with a small increase of 64,000 in November and an uptick in the Unemployment Rate to 4.6%. This mixed job data does not seem to have a significant impact on policy outlooks. If CPI rises to 3.3% or higher, it may lead to the Fed maintaining its current policy, boosting the US Dollar. However, if inflation drops to 2.8% or less, a rate cut could become likely, which may weaken the Dollar. The technical outlook for the US Dollar Index appears bearish, although recent indicators suggest a loss of negative momentum. The RSI on the daily chart points to recovery, with Fibonacci retracement levels defining possible resistance and support points.

November Inflation and Its Impact

The November inflation data has arrived, and it was higher than expected at 3.3% year-on-year. Core inflation also remained persistent at 3.1%, creating doubt about quick disinflation. Following this report, the odds of a January rate cut have sharply decreased from around 20% to below 10%. This inflation pressure is backed by other recent data showing strong retail sales in November and a significant rise in consumer sentiment for early December. Despite mixed job reports linked to the government shutdown, consumer resilience suggests the Federal Reserve may not feel the need to ease policy soon. Atlanta Fed President Bostic recently noted that companies are keen to protect their profit margins. For derivative traders, this signals a positive outlook for the US Dollar in the near future. The expectation of sustained higher interest rates should support the dollar against other major currencies. Therefore, demand for call options on the US Dollar Index (DXY) is likely to rise, along with implied volatility for currency pairs like EUR/USD and GBP/USD. Traders might consider strategies that benefit from a hawkish Fed, such as buying puts on Treasury note futures, anticipating that yields will stay high or increase. The DXY index has now clearly surpassed the 98.60 level, which aligns with the 100-day moving average. The next important benchmark to watch is the resistance zone around 98.85, making this a suitable target for short-term bullish strategies. This situation is unfavorable for non-yielding assets like Gold. Historically, higher real interest rates, such as during the tightening cycle of 2022, raise the opportunity cost of holding gold, which could pressurize its price further. Derivative strategies may involve buying puts on gold futures or selling call spreads to profit from a potential decline towards recent lows. Create your live VT Markets account and start trading now.

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