Yesterday's US inflation report came in hotter than expected, and the dollar rallied as traders repriced the Fed. A December hike is now fully priced. The question is the size of it.
What the Print Showed
Headline CPI rose 0.4% month on month in October against the 0.3% the Street expected. Core rose 0.3% against 0.2%, the third month in a row at that pace, which annualises at roughly 3.6%. There is no year-on-year rate this month, because the government shutdown last October meant the October 2025 data was never collected.
Core strips out food and energy, so three straight months at 0.3 show the oil shock is no longer contained in the energy line. Higher costs are being passed on to consumers. These are second-round effects, and the Fed sees them too. Waller cited new Fed research that suggests "core inflation may be more responsive to energy shocks" since the pandemic. Brent has since dropped from $118 to the low $90s.
Waller Named the Number
Hours before the release, Fed Governor Waller spoke in London. "Let's just say it. September's inflation data were bad." His base case was a 25bps hike in December. But he added that if October core came in "around 0.3 percent or even higher", a 50bps hike "should be considered at the December meeting". His reason was credibility: "Hiking only 25 basis points would put our credibility at risk". Core then followed at 0.3.
Others on the committee are hawkish too, though none have called for 50. Hammack and Cook voted for a 25bps hike at the October hold, and Logan has called for two more increases.
Fed Officials Are Getting Out Ahead of the Data
Fed officials have been getting out ahead of the data to keep market pricing in line with what the committee intends to do. Waller has said as much: "This signaling helps to anchor the path of short-term interest rates".
Yesterday was the third example in six weeks. Six weeks ago, Williams said there was "no need for urgency" and Vice Chair Jefferson said the committee "will need to come to our own judgment, which may take more time". Pricing for an October hike fell from around 70% to around 24% that week. September CPI then came in hot, and the Fed held anyway.
Why the Dollar Rallied
CME FedWatch now prices a December hike at 100%, with an 88.4% chance of 25bps and an 11.6% chance of 50bps. A day earlier a hike was priced at around 85%, and 50 was close to zero. The dollar index rose 0.5% on the day to around 102.2, close to its highest since late October, the 10-year Treasury yield climbed back to 5%, and cable fell back into the 1.33s.
The dollar is rising even with oil at its lowest since August and the AI trade unwinding, both of which would normally weigh on it. For now, the US rates story is back in the driving seat.
What Could Change It
A 50bps hike still looks unlikely, but it is now in the conversation. Our base case remains a 25bps hike on the 9th of December.
The data is unlikely to settle it. PCE lands later this month, but most of it can be worked out in advance from CPI and PPI, and after yesterday's print it is not going to be soft. Friday's PPI fills in the rest, and payrolls follow on the 4th of December.
So it comes down to what the committee says. Waller is one vote. Williams and Jefferson, who are both part of the troika, carry more weight, and neither has backed 50. Williams is on a panel on Thursday and Jefferson speaks on Friday. If either echoes Waller, 50 becomes a real debate. If they stick to 25, that pricing should fade.
The main risk to the dollar is a signed deal with Iran. That would push oil lower still and, in time, ease the pressure on the Fed. For now there is no signed agreement, and Tehran denies talks are taking place.
The Levels to Watch
Technical levels are only a guide, as the Fed and geopolitics are what is moving this market, but they show where a move might pause.
Cable is sitting on support at 1.33. Below that, the August low at 1.3274 is the next marker, followed by the October low at 1.3137. On the way back up, the 200-day moving average at 1.3420 is the first resistance, with last week's high just under 1.35 above it. EUR/USD has spent the past month between roughly 1.11 and 1.1270, and is now close to the bottom of that range. A break below 1.11 would bring the May 2025 low at 1.1065 into view.
What This Means for Businesses
The Bank of England raised Bank Rate to 4% last week, level with the top of the Fed's range. Markets see a second move in December as roughly a coin toss. We think February is more likely now that oil is back below $100, so a December hike from the Fed would reopen that gap in the dollar's favour, and a 50bps move would widen it further. We would expect more pressure on the pound if that pricing builds.
For businesses buying dollars, the risk is that repricing has further to run if more of the committee follows Waller. For those selling dollars, levels have improved this week. To talk through an upcoming requirement before the 9th of December, speak to the Lamera Capital dealing team.
What the Print Showed
Headline CPI rose 0.4% month on month in October against the 0.3% the Street expected. Core rose 0.3% against 0.2%, the third month in a row at that pace, which annualises at roughly 3.6%. There is no year-on-year rate this month, because the government shutdown last October meant the October 2025 data was never collected.
Core strips out food and energy, so three straight months at 0.3 show the oil shock is no longer contained in the energy line. Higher costs are being passed on to consumers. These are second-round effects, and the Fed sees them too. Waller cited new Fed research that suggests "core inflation may be more responsive to energy shocks" since the pandemic. Brent has since dropped from $118 to the low $90s.
Waller Named the Number
Hours before the release, Fed Governor Waller spoke in London. "Let's just say it. September's inflation data were bad." His base case was a 25bps hike in December. But he added that if October core came in "around 0.3 percent or even higher", a 50bps hike "should be considered at the December meeting". His reason was credibility: "Hiking only 25 basis points would put our credibility at risk". Core then followed at 0.3.
Others on the committee are hawkish too, though none have called for 50. Hammack and Cook voted for a 25bps hike at the October hold, and Logan has called for two more increases.
Fed Officials Are Getting Out Ahead of the Data
Fed officials have been getting out ahead of the data to keep market pricing in line with what the committee intends to do. Waller has said as much: "This signaling helps to anchor the path of short-term interest rates".
Yesterday was the third example in six weeks. Six weeks ago, Williams said there was "no need for urgency" and Vice Chair Jefferson said the committee "will need to come to our own judgment, which may take more time". Pricing for an October hike fell from around 70% to around 24% that week. September CPI then came in hot, and the Fed held anyway.
Why the Dollar Rallied
CME FedWatch now prices a December hike at 100%, with an 88.4% chance of 25bps and an 11.6% chance of 50bps. A day earlier a hike was priced at around 85%, and 50 was close to zero. The dollar index rose 0.5% on the day to around 102.2, close to its highest since late October, the 10-year Treasury yield climbed back to 5%, and cable fell back into the 1.33s.
The dollar is rising even with oil at its lowest since August and the AI trade unwinding, both of which would normally weigh on it. For now, the US rates story is back in the driving seat.
What Could Change It
A 50bps hike still looks unlikely, but it is now in the conversation. Our base case remains a 25bps hike on the 9th of December.
The data is unlikely to settle it. PCE lands later this month, but most of it can be worked out in advance from CPI and PPI, and after yesterday's print it is not going to be soft. Friday's PPI fills in the rest, and payrolls follow on the 4th of December.
So it comes down to what the committee says. Waller is one vote. Williams and Jefferson, who are both part of the troika, carry more weight, and neither has backed 50. Williams is on a panel on Thursday and Jefferson speaks on Friday. If either echoes Waller, 50 becomes a real debate. If they stick to 25, that pricing should fade.
The main risk to the dollar is a signed deal with Iran. That would push oil lower still and, in time, ease the pressure on the Fed. For now there is no signed agreement, and Tehran denies talks are taking place.
The Levels to Watch
Technical levels are only a guide, as the Fed and geopolitics are what is moving this market, but they show where a move might pause.
Cable is sitting on support at 1.33. Below that, the August low at 1.3274 is the next marker, followed by the October low at 1.3137. On the way back up, the 200-day moving average at 1.3420 is the first resistance, with last week's high just under 1.35 above it. EUR/USD has spent the past month between roughly 1.11 and 1.1270, and is now close to the bottom of that range. A break below 1.11 would bring the May 2025 low at 1.1065 into view.
What This Means for Businesses
The Bank of England raised Bank Rate to 4% last week, level with the top of the Fed's range. Markets see a second move in December as roughly a coin toss. We think February is more likely now that oil is back below $100, so a December hike from the Fed would reopen that gap in the dollar's favour, and a 50bps move would widen it further. We would expect more pressure on the pound if that pricing builds.
For businesses buying dollars, the risk is that repricing has further to run if more of the committee follows Waller. For those selling dollars, levels have improved this week. To talk through an upcoming requirement before the 9th of December, speak to the Lamera Capital dealing team.