Dollar hits two-month low after October inflation report 

On Tuesday, the U.S. dollar index fell by more than 1%, dropping below the 105 mark and hitting its lowest point since mid-September. This decrease came after U.S. consumer price data showed signs that underlying inflation slowed in October, increasing the odds that the Federal Reserve (Fed) is done hiking interest rates. 

According to the U.S. Bureau of Labor Statistics, the recent consumer price index (CPI) report showed a bigger slowdown in the U.S. inflation rate than expected for October, hitting 3.2%. The core inflation rate, which excludes volatile items such as food and fuel, dropped to 4%, the lowest in over two years.  

Traders now think there's less than a 10% chance that the Federal Reserve will raise its policy rate beyond the current 5.25%-5.50% range. On the flip side, the likelihood of rate cuts starting in May has increased.  Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin, summarised a popular take on the inflation reading to the Reuters news agency: 

"You can say goodbye to the rate hiking era.” 

Investors are eagerly waiting for more data on U.S. producer inflation and retail sales later this week, as well as additional insights from central bank officials. 

US interest rates: Markets pricing indicates Fed done with hikes 

In his morning notes on Tuesday, Markets.com Chief Market Analyst Neil Wilson wrote that the October CPI would likely indicate the Federal Reserve’s future policy trajectory: 

“The CPI is important for the market because we’ve seen a big pivot in yields, but it won’t change the outlook for the December Fed meeting much because no one thinks the Fed will change that quickly. It will however, be a fair indication of what moves the Fed will make in the medium term. What will matter is the persistence of inflation over the coming months and the resilience in the labour market to withstand rate hikes already carried out.” 

As observed by MarketWatch reporter Joseph Adinolfi, the anticipation of another interest rate hike from the Federal Reserve by year-end has all but disappeared following the release of the October inflation report, with traders now projecting as many as five rate cuts in 2024.  
 
Data from the CME Group reveals that futures traders are currently assigning nearly a 100% probability that the Fed will maintain interest rates after its upcoming policy meeting in December. They are also pricing in a minimum of four rate cuts by the conclusion of the Fed's December 2024 policy meeting, with the likelihood of a fifth cut more than doubling to nearly 23%, according to the CME's FedWatch tool. 

Analysts at Frankfurt-based Commerzbank concurred with the prevailing market view: 

“Today's data should reinforce the market's view that the Fed will not raise its key interest rates any further (this has also been our forecast for some time)”. 

USD forecast: Scotiabank, ING point to potential DXY weakness 

In a USD forecast issued on November 14, Shaun Osborne, Chief FX Strategist at Scotiabank, wrote that a decline below 105.30 would be a “negative” for the dollar index: 

“The DXY is showing some signs of technical softness after gains last week stalled just below the 40-DMA. DXY weakness below 105.30 on the day would be another negative for the index.  

Resistance looks firmer now around 105.95/106.00 but there is still the open gap around 106.50 on the chart left by the sharp drop in the index at the start of the month. That may still have to be filled at some point”. 

In his dollar forecast, Francesco Pesole, an FX Strategist at Dutch bank ING, said the DXY index could slip to the 105.20 area given a surprise CPI reading: 

“We see some downside risks to the dollar given a potential downside surprise in CPI, and DXY could slip to the 105.20-.40 area. Expect some support mostly coming the way of procyclical currencies, while we remain unconvinced that the yen can truly benefit from slight tweaks in the US/Fed narrative at this stage”. 

At the time of writing, the DXY dollar index was 1.06% down on the day, trading around the 104.50 area — much lower than forecast by ING. 

The euro to dollar rate gained over 1.2% to trade around $1.0830. The pound to dollar exchange rate — widely known as “cable” in forex markets — showed a similar dynamic, with GBPUSD trading at $1.2455 (1.43% up on the day) on dollar weakness.