The U.S. dollar held steady near a 6-1/2-month high against major currencies on Wednesday, while Bitcoin remained just below its all-time peak as markets awaited crucial U.S. inflation figures and continued to react to the market dynamics known as the “Trump trade.”
The dollar has been boosted by expectations of inflationary policies following Donald Trump’s recent victory in the U.S. presidential election. Investors are pricing in lower taxes and trade tariffs under the incoming Republican administration, which are anticipated to fuel inflation, thereby supporting the value of the dollar.
The so-called “Trump trade” has also pushed up U.S. Treasury yields, as markets now expect the Federal Reserve to slow the pace of its rate cuts in the face of potential inflationary pressures. With Trump’s Republican Party set to control both chambers of Congress when he assumes office in January, expectations are growing that he will implement policies to cut taxes and reduce the size of the federal government.
The U.S. dollar index, which tracks the dollar against a basket of major currencies, rose 0.02% to 106.01, just shy of Tuesday’s peak of 106.17, its highest level since May 1. Meanwhile, Bitcoin paused its recent rally, slipping 0.23% to $87,105.05 after hitting a record high of $89,998 the previous day. Trump’s campaign to make the U.S. “the crypto capital of the world” continues to support Bitcoin’s bullish momentum.
Inflation Data in Focus
The focus of traders and investors is now on the upcoming U.S. inflation data, with the October Consumer Price Index (CPI) report set to be released later on Wednesday. The core CPI is expected to rise by 0.3%, but any surprise above that could further diminish the chances of a rate cut from the Federal Reserve in December.
“Inflation and the Fed’s policy stance are likely to take center stage later this week, but whether this leads to a reversal of the Trump trade remains uncertain,” said Charu Chanana, Chief Investment Strategist at Saxo Bank.
Markets are also uncertain about the Federal Reserve’s path forward, particularly if inflation continues to rise under Trump’s administration. Higher inflation could limit the Fed’s ability to further reduce interest rates.
Currently, traders are pricing in a roughly 60% probability of a 0.25% rate cut by the Fed in December, down from around 84% a month ago, according to CME Group’s FedWatch Tool.
Fed Officials Keep Options Open
Further commentary from Federal Reserve officials has added to the uncertainty. On Tuesday, Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin both indicated that they were not yet ready to determine how quickly or by how much the Fed should reduce interest rates. Federal Reserve Chairman Jerome Powell is scheduled to speak on Thursday, just ahead of the release of the U.S. Producer Price Index (PPI) and retail sales data later in the week.
Euro Remains Under Pressure
The euro continued to struggle, pressured by political uncertainty in Europe. Germany, the largest economy in the eurozone, is set to hold elections on February 23, following the collapse of Chancellor Olaf Scholz’s governing coalition. Additionally, concerns over potential tariffs from the Trump administration on Europe and China are weighing on the currency.
The euro was last trading down 0.05% at $1.061875, still hovering near a one-year low of $1.0596 reached on Tuesday.
British Pound Flat Amid Stronger Dollar
Sterling was largely unchanged at $1.2746, as the British currency remained under pressure from the broadly stronger U.S. dollar. Meanwhile, Japan’s wholesale inflation accelerated in October, primarily driven by a weaker yen, which pushed up import prices. This complicates the Bank of Japan’s decision on when to raise interest rates.
The dollar gained 0.17% against the yen, reaching 154.88, after briefly touching 154.934, its highest point against the Japanese currency since July 30.
Aussie Dollar Faces Ongoing Pressure
The Australian dollar, which is sensitive to China’s economic performance, continued to face downward pressure, dropping 0.02% to $0.6531. Australian wage growth slowed to its weakest pace since late 2022 in the third quarter, partly due to an influx of new workers and easing inflation. This weak data further strengthens the case for potential interest rate cuts by the Reserve Bank of Australia.
