Soft CPI data derail the dollar amid hopes for a Fed “pivot”

The dollar is set to end the week substantially lower, adding today to its broad-based weakness following the softer-than-expected US October CPI report. The data were in line with our view that inflation in the US economy is easing, and investors have revised down their expectations for Fed tightening closer to our own forecasts. So it seems to us that the Fed’s hawkish stance has now mostly run its course as a key tailwind for the rally in the US dollar. But we don’t think that this tailwind will shift to a major headwind just yet. After all, we doubt the FOMC will put much weight on one month’s data (especially as inflation remains elevated) or welcome the sharp easing in financial conditions.