Dollar calm as traders gird for US inflation data

The U.S. dollar held steady, poised for a weekly gain, as investors anticipate a Federal Reserve rate cut next week, largely undeterred by upcoming inflation data. Trade tensions resurfaced with President Trump ending negotiations with Canada, though broader market reaction was subdued, while expectations for the upcoming Trump-Xi meeting remain low, likely yielding only a temporary trade truce. Concurrently, new U.S. sanctions on Russian oil suppliers pushed oil prices higher, weakening the yen, which also faces headwinds from Japan's new Prime Minister's large stimulus package potentially delaying a Bank of Japan rate hike despite elevated inflation.

Analysis

The U.S. dollar held steady, poised for a modest weekly gain, as markets anticipate a 25 basis point Federal Reserve rate cut next week. Upcoming U.S. CPI data (0.4% headline, 0.3% core MoM) is not expected to deter this immediate cut but could influence December policy.

Trade tensions re-emerged as President Trump terminated negotiations with Canada, causing a slight easing of the Canadian dollar, though market reaction was subdued. Investor focus shifts to the Trump-Xi meeting, where expectations for a significant U.S.-China trade resolution are low, anticipating at best a temporary truce and modest currency impact.

New U.S. sanctions on Russian oil suppliers, Rosneft and Lukoil, following British measures, propelled oil prices higher. This geopolitical development subsequently pressured oil-import-tied currencies, notably weakening the Japanese yen to a two-week low.

Despite Japan's core consumer prices remaining above the 2% target, the Bank of Japan faces hurdles for a near-term rate hike. Prime Minister Takaichi's impending economic stimulus package, potentially exceeding $92 billion, is seen as a factor delaying BOJ action.

Key Decisions for Investors

• Monitor U.S. CPI data for significant upside surprises, as this could shift expectations for the Fed's December rate path despite the near-certain cut next week
• Maintain a cautious stance on trade-sensitive assets ahead of the Trump-Xi meeting, as expectations for a substantive resolution are low, likely yielding only a temporary truce
• Evaluate potential currency volatility in oil-importing nations, particularly the Japanese yen, given rising oil prices from sanctions and the interplay between Japan's fiscal stimulus and delayed BOJ monetary tightening
• Assess the implications of Japan's fiscal expansion under PM Takaichi, as it may delay BOJ rate normalization despite persistent inflation, potentially impacting JPY and Japanese asset valuations