Dollar Edges Higher; PCE Data Points to Early Fed Hike

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By Peter Nurse

Investing.com - The dollar pushed higher in early European trading Monday, continuing the previous session’s gains after strong inflation numbers cemented the case for tapering at this week’s Federal Reserve meeting.

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 94.243, just below Friday's peak of 94.302, a level not seen since Oct. 13.

This follows the release of data Friday which showed the Fed’s favorite inflation measure, core personal consumption expenditures index, rising at an annual 4.4% in September, the fastest since 1991.

The central bank holds a two-day policy-setting meeting this week, concluding on Wednesday, and is widely expected then to announce a tapering of stimulus. However, these continued inflationary pressures have solidified market expectations that the Fed will start increasing interest rates earlier than previously guided.

Influential investment bank Goldman Sachs (NYSE:GS) has responded by bringing forward its forecast by a year to July 2022 for the first U.S. interest rate hike following the pandemic.

"The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3% — and core CPI inflation above 4% — when the taper concludes," Goldman's chief economist, Jan Hatzius, wrote in a client note over the weekend. 

USD/JPY traded 0.3% higher at 114.33, just below the strongest level since Oct. 20, after Japanese Prime Minister Fumio Kishida's ruling Liberal Democratic Party defied expectations and held onto its strong majority in Sunday's parliamentary election. This could mean that he now has leeway to push through more stimulus to boost the beleaguered economy, at the expense of the yen.

GBP/USD dropped 0.2% to 1.3659 ahead of Thursday’s Bank of England meeting, which could see the central bank lift interest rates if it judges the country’s economy to be strong enough to cope as inflation mounts.

AUD/USD was 0.3% lower at 0.7502, retreating from a near four-month high of 0.7555 reached last week ahead of Tuesday’s meeting of the Reserve Bank of Australia.

The country’s central bank is under pressure to drop a commitment to keep yields on its April 2024 target bond at 0.1% as house prices soar. Late last week it chose not to defend the 0.1% target for three-year bond yields, which consequently rose to over 0.8%. 

EUR/USD fell 0.1% to 1.1553, only marginally above Friday's low of 1.1535, the weakest since Oct. 13, which followed Thursday’s European Central Bank meeting.