A surprisingly mild US PPI inflation print yesterday caused some dollar softness. The 0.0% MoM core PPI directly impacts the December core PCE, which is the Fed’s preferred inflation measure, but it does not automatically mean today’s core CPI will be as benign, ING’s FX analyst Francesco Pesole notes.

Markets are pricing in US protectionism

“Our US economist notes that two PPI components – airline fares and car rental prices – rose substantially, and are expected to be major contributors to another hot core CPI print. Consensus is split between 0.2% and 0.3% MoM, with the average forecast at 0.25% (rounding up to 0.3%). That means 0.3% – which is our call – should be interpreted as a hawkish signal for the Fed and favour dollar appreciation.”

“Also weighing on the dollar yesterday was the report that Trump’s economic advisers are drafting a plan to raise tariffs only gradually (by 2-5% a month). This approach is aimed at giving Trump negotiating leverage while having greater control over the inflationary effects compared to large one-off tariffs. This is the second major report suggesting the new administration will not take an aggressive, carpet approach to protectionism. That is also consistent with indications that Congress will focus on delivering a three-in-one (migration, energy, tax cuts) bill by April, a signal that the very initial focus could be on domestic policies.”

“We doubt that warrants any substantial unwinding of dollar longs though. Markets are pricing in US protectionism, but probably not a big universal tariff delivered in one go. Even if tariffs are hiked gradually, markets may not be as optimistic as Trump’s team that inflation can be controlled. A hot CPI today could easily get investors jittery on the inflation topic before tariffs are even considered.”