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German CPI set to be confirmed at 3% as rate cut bets increase  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   The last two days have seen European markets struggle to build on the gains of last week, with some modest profit taking starting to kick in, even as investors start to price in the prospect of rate cuts as soon as next year.   In the space of a week, we've gone from higher for longer back to rate cuts in 2024, and this time the push back from central bankers isn't anywhere near as aggressive. In a way its not hard to understand this sort of shift given the economic data we're seeing out of Europe; however, the US is a slightly different matter given the greater resilience of the US economy.   Yesterday Bank of England chief economist Huw Pill said that it wasn't unreasonable to predict rate cuts in the middle of next year, sending UK 2-year gilt yields to their lowest levels since early June, ahead of next week's October inflation numbers which could see a sizeable slowdown in the headline rate of CPI from 6.7% to somewhere below 5%.   Given the challenges facing the UK economy in the coming months however it's not too much of a stretch to suggest that a lack of demand might do the central bank's job for it. The same argument applies to Europe and the European Central Bank where headline inflation is lower than in the UK and in today's final German CPI numbers for October is expected to fall from 4.3% to 3%, the lowest level since June 2021.  

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.