Dovish remarks from Federal Reserve Governor Christopher Waller have sparked discussions about potential interest rate cuts in the first half of 2025, should inflation data remain favorable. However, rising import prices, which increased by 0.1% in December and 2.2% y/y, pose a significant challenge to this outlook. These import prices, excluding petroleum, rose 0.2% for the month and 2.4% y/y, suggesting that inflationary pressures are building. This development could force the Fed to reconsider any plans for rate cuts, as higher inflation typically necessitates maintaining or even increasing interest rates.
The anticipation of tariffs under the incoming administration of President-elect Donald Trump could further exacerbate import price increases, adding to inflationary pressures. This scenario is likely to impact both equity and fixed-income markets negatively, as higher inflation expectations could lead to higher future interest rates, affecting valuations. Consequently, the dollar is expected to strengthen as investors adjust to the possibility of a more hawkish monetary policy stance.
As of 17:39 on January 16, the DXY Index stands at 108.94, slightly down from its last close of 109.09. The market is closely watching the evolving economic landscape, with the dollar's trajectory reflecting the complex interplay of inflation expectations and potential policy shifts.