US Inflation in Focus in the New Week

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During a quiet period for Canadian data releases, all eyes will be on US inflation estimates this week. As consumer prices continue to be influenced by relatively low year-ago prices, US CPI growth is predicted to remain elevated—up about 6% from October 2020. A small number of components such as used vehicles and energy, both of which likely climbed higher again in October, accounts for over half of the increase in the CPI relative to pre-COVID levels. The more current concern in both the US and Canada is that pricing pressures are widening as demand improves and output is constrained by global supply chain disruptions and labor shortages.

In Canada, housing costs have always been a larger CPI driver, and the resale market is extremely tight, pushing up the fees and prices of real estate agents/brokers. They continued to rise in October, and early market reports indicated that housing price growth accelerated again.

The Bank of Canada acknowledges that price pressures are more persistent, and expects inflation to average 4.8% in the fourth quarter and slow to an average of 3.4% next year. The Fed stated at its November meeting that the rise in inflation is “expected to be temporary” and that vaccines and alleviation of supply constraints should support continued employment growth and declining inflation. The Bank of Canada (whose sole responsibility is to monitor inflation) reiterated at a recent meeting that policymakers are closely monitoring inflation expectations and labor cost growth, looking for signs that recent inflationary pressures may be longer than their current expectations.

Inflation in the US is expected to have remained elevated in October, rising by 0.5 percent from September and 5.8% year on year. Price increases will be restrained by supply-side constraints such as port congestion, input shortages, and labor shortages. Beyond the pandemic’s base impacts, the progression of monthly price gains will be the primary emphasis.

US Dollar Index Failed To Extend Surge Once More

Despite the Fed’s tapering and a series of strong non-farm payroll data, the Dollar’s gains were limited by risk-on mood and dropping rates. Even the EUR/break USD’s of the 1.1523 low was hesitant. The dollar index also failed to hold above the 94.46 Fibonacci level for the second time.

As long as the 93.27 support holds, the near-term outlook will remain optimistic. Sustained trade above 94.46, the 38.2 percent retracement of 102.99 to 89.20, could indicate a medium-term positive reversal, with the 61.8 percent retracement at 97.72 as the next objective.

However, a break of the 93.27 support level will confirm rejection by 94.46, implying that medium-term bearishness is still present. The price would then drop even further, back to 89.20.