fundamental alert

US Dollar: CPI Forecasted to Fall by Most on Record, But Fed Meeting Minutes May Steal the Show

Wednesday, 19 November 2008 22:21:46 GMT  |  Terri Belkas, Currency Strategist

The US dollar held strong on Tuesday as the currency continues to consolidate within an increasingly tight range. However, the US dollar initially slipped on the release of the US Producer Price Index (PPI) as the report told two different stories about the inflation picture in the US. The headline reading plummeted by the most on record during October, helping to drag the annual rate of growth to a 1-year low of 5.2 percent from 8.7 percent. However, the Federal Reserve may find it somewhat disconcerting that PPI excluding food and energy actually rose 0.4 percent during the month, pushing the annual rate to a nearly 20 year high of 4.4 percent from 4.0 percent. Looking ahead to Tuesday, the US Consumer Price Index (CPI) is anticipated to have plunged 0.8 percent during the month of October, which would mark the sharpest drop since 1949, while the annual measure is projected to slip to a 5-month low of 4.1 percent. Like the release of PPI, the headline CPI results should be weighed down by volatile food and energy prices given the drop in commodities since the summer. However, if the core readings that exclude these factors fail to fall as well, there may be an increase in concerns that the Federal Reserve will not move forward with additional rate cuts in December.

That said, the release of the minutes from the Federal Open Market Committee's October meeting could garner even more attention than the US CPI figures as they will give clearer insight into the Fed's bias going forward. The thing to watch with the minutes is to see how much the FOMC focuses on downside risks to growth and declining inflation expectations. Since risk trends have been the primary driver of price action lately, it will likely be best to gauge the stock market’s reaction as a pessimistic turn in sentiment could lead equities lower, and thus lead the US dollar higher given their negative correlation.

Related Article: US Dollar Weekly Forecast, US Dollar Trading Ranges Could Break Amidst US, UK, Canadian Event Risk

**For a full list of upcoming event risk and past releases, go to the DailyFX Calendar

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