The dollar is easing, but the outlook for inflation remains high on investors’ radar

LONDON, Dec 12 (Reuters) – The dollar edged lower on Monday but losses were capped by data from last week that showed U.S. wholesale inflation rose more than expected last month, reinforcing views that the Federal Reserve may to have to keep interest rates higher for longer.

The US currency made the biggest gains against commodity-linked currencies such as the Australian and New Zealand dollars, but briefly rose as much as 0.5% against the pound after data showed that The UK economy recovered in October of a public holiday for Queen Elizabeth’s funeral, but still pointed to a bleak outlook.

Sterling was last up 0.2 percent at $1.2287, after falling to a session low of $1.2207, and was down 0.1 percent against the euro at 86.03 pence.

This week is one of the busiest macro-level so far this year, with four major central banks holding their final policy meetings of the year, plus consumer inflation data from the United States that could be crucial in determining the outlook for US interest rates and the dollar.

The US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank will publish interest rate decisions.

“With any luck, one would hope that by the end of the week, markets will probably be able to revise down their expectations a little bit about where the Bank of England and ECB interest rates will peak and be confident that the Fed will go with 5% – or north of that,” said Berenberg economist Callum Pickering.

“It’s really going to be an interesting development across all asset classes because until now what we’ve had has been a ‘follow the Fed’ rulebook and what are we seeing in the currency markets, what are we seeing in equities? I believe the Fed will go ahead, the ECB will stop early and the Bank of England will probably stop hiking after this week,” he said.

The euro pared overnight losses and rose 0.4% to $1.0567. The single European currency has gained almost 8% so far in the fourth quarter, as investors previously counted on the ECB to stick to an aggressive rate hike.

Those expectations have been tempered somewhat, and money markets indicate the ECB is most likely to raise rates by just half a percentage point this week.

The Federal Reserve is expected to deliver a rate hike of the same size after a string of 75 basis point hikes, especially given the tight labor market and relatively resilient economy.

Friday’s data, which showed the U.S producer prices rose 7.4% year-on-year in Novembercompared with forecasts for growth of 7.2%, reminded investors how sticky inflation is proving to be.

“There was little concern about how inflation would be persistently high and encourage the Fed to keep policy at a tighter level even longer than expected,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (CBA). .

November consumer inflation data lands on Tuesday and is expected to show a 6.1 percent increase in the core reading, which excludes food and energy prices, down from 6.3 percent in October.

“Given the very close proximity to the FOMC (consumer inflation data), it clearly has the ability to change the tone of the announcement, the statement and the dot charts, but it’s very unlikely to change the headline by 50 bps,” Deutsche Bank strategist Jim Reid said.

Against the yen, the dollar rose 0.2% to 136.78. The Australian dollar was last down 0.4% at $0.6772, after falling 0.2% at $0.6406.

The offshore yuan was mostly steady at 6.977 to the dollar, further pressured by concerns about a potential spike in COVID cases as China eases its strict COVID-19 restrictions.

Reporting by Rae Wee; Editing by Lincoln Feist, Bradley Perrett and Christian Schmollinger

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