Trading activity is muted across the foreign exchange markets this morning as participants await the latest inflation numbers and prepare for tomorrow’s Federal Reserve decision. The dollar and Treasury yields are slightly weaker, while commodity-complex currencies are inching higher.

The pound is holding its ground and the implied likelihood of a half-percentage-point hike at Thursday’s Bank of England meeting is effectively unchanged after the latest numbers showed labour markets remaining tight in the face of a broader economic slowdown. According to the Office for National Statistics, a better-than-forecast 107,000 jobs were created in November, while the labour force survey showed a 27,000-position gain in the three months through October. Average wages climbed at an annualized 6.1 percent, helping narrow the gap with substantially-faster price gains.

China’s yuan continues to weaken in offshore markets as the government’s rollback of “zero-covid” policies triggers a sharp rise in infections and worker absences. After being inundated with propaganda messages dramatizing the coronavirus threat for most of the last three years, citizens fear exposing themselves to the virus, magnifying the impact on overall productivity levels. Investors now expect growth to slow before the reopening effort translates into a deeper recovery in the early new year.

Data out at 8:30 is expected to show US consumer prices increasing 0.3 percent in November from a month earlier, up 7.3 percent from the prior year. Excluding food and energy, the core measure is seen climbing 0.3 percent month-over-month and 6.1 percent year-over-year – a pace that would mark a gradual deceleration from earlier in the year, but one that remains far above policy targets.

Last month, a slightly weaker-than-anticipated print triggered a broad-based selloff in the dollar – but markets appear prepared for such an outcome today, suggesting that an overreaction is more likely if the data comes in stronger than forecast.

This time, market participants won’t have to wait long to gauge the policy reaction – the Federal Reserve is set to publish its latest set of economic projections tomorrow, with Chair Jerome Powell then facing questioning on whether inflation pressures are cooling at the desired pace. Traders generally expect him to make hawkish noises, but to avoid tilting aggressively against a loosening in financial conditions as he attempts to guide the economy into a “soft landing” that weakens inflation without triggering a surge in unemployment.

Karl Schamotta, Chief Market Strategist