US CPI comes in as expected at 6.8% causing the dollar to dip as speculators close positions

November CPI came in as forecast at 6.8% YoY representing a jump from prior month's 6.2% and the highest reading since 1982.

The US dollar has increased over 5% relative to a basket of currencies (BBDXY Index) since the start of 2021 – mostly on expectations of rate increases next year by the Federal Reserve. Today’s high inflation numbers were expected so most volatility will be political as pressure is sure to build for the Biden administration to address higher prices.

The pound continues to trade near one-year lows against the dollar as new COVID restrictions weigh on sentiment. Subsequently, expectations for a BoE rate hike in December continue to be pushed back. The UK economy barely grew in October, with GDP rising just 0.1% for the month, missing expectations of 0.4%. Supply chain issues led to the decline, with manufacturing and construction output falling well below forecasts.

The euro continues to trade close to its weakest levels since summer 2020 and down over 7% on the year. The US Federal Reserve is expected to raise interest rates next year at a faster pace than the European Central Bank. Both central banks meet next week and will be the primary focus of FX markets.

The Canadian dollar gained vs. the US dollar as the price of oil continued to increase off November lows. The Canadian dollar seems ripe to outperform the US dollar as oil prices have increased 50% this year and interest rate expectations are such that the Bank of Canada is expected to lift rates before the Federal reserve. CAD is up only slightly relative to the greenback for the year.

The Chinese renminbi strengthened slightly despite Chinese authorities telling mainland banks to buy foreign currencies and the daily fixing coming in at a weaker level. On a trade weighted basis, the renminbi is at its strongest level since mid-2015.

The Aussie dollar gained this morning following US CPI data and is now up 2.7% since December 3 lows. Some rebound in AUD was expected following a commodity price rout in November. The A-dollar remains 6% lower compared with the start of the year.