US DOLLARFUNDAMENTAL FORECAST: BULLISH

• US Dollar struggling to find direction after Fed policy pivot
• Inflation data may help revive flagging rate hike expectations
• Shaky European politics may stoke haven demand for USD

Another week of directionless volatility left the US Dollar mired in familiar territory. A first test of the currency’s reaction function to top-tier economic data after the Fed’s recent strategy pivot – November’s employment report – offered mixed results. Prices fell as the headline payrolls print missed forecasts but swiftly recovered as traders digested a steady jobless rate and wage growth matching a nine-year high.

US CPI DATA MAY HELP REVIVE FED RATE HIKE OUTLOOK

The week ahead will see another critical bit of economic data in the spotlight: November’s CPI report. The headline inflation rate is expected to tick down but the core reading excluding volatile food and energy prices – a measure of the underlying trend that is often most meaningful for monetary policy – is seen rising for the first time in four months, to 2.2 percent on-year.

Such an outcome would be broadly in line with the overall trajectory prevailing in in 2018. That is a backdrop that led investors to expect four Fed rate hikes in this year and 2-3 further increases in 2019 until the recent dovish expectations shift. An outcome that suggests this pivot was an overreaction might help rebuild the tightening outlook, helping the Greenback to recover.

SHAKY EUROPEAN POLITICS MAY STOKE HAVEN USD DEMAND

External forces may likewise play a role in shaping US Dollar price action, with European politics in focus. First, the UK Parliament will vote on the Brexit deal negotiated by Prime Minister Theresa May. The outcome of that poll as well as on-going tension over Italy’s budget will then be discussed by at an EU leaders’ summit. Reports suggest Rome may submit revised fiscal plans before the gathering.

For her part, Ms May does not seem to have the votes to triumph. It is unclear what is to follow if she fails. As for Italy, its recently installed anti-establishment government has sent mixed signals about its willingness to compromise with regional authorities. Capital flows seeking to sidestep the uncertainty surrounding these outcomes may buoy the world’s go-to reserve currency.