FOREX-Dollar steadies as Waller argues for more rate hikes, inflation up next

The dollar nudged higher on Tuesday following a bumpy few days, helped by hawkish remarks from Federal Reserve Governor Christopher Waller ahead of US inflation data that could lift it further if rate ‌hike bets strengthen. Headline consumer inflation is seen picking up to 3.9% and core inflation to 2.8% year-on-year in October, according to economists polled by Reuters, and a miss on either side would shape the direction for the dollar in the coming weeks.

"We've seen two consecutive stronger core CPI prints, so ‌if we saw a third such print today, it would definitely add to concerns amongst market participants and also the Federal Reserve over the ‌risk that higher energy prices are spilling over into broader inflation pressure," said Lee Hardman, senior currency analyst at MUFG. "That would obviously strengthen the need for the Fed to hike rates more, and the market would see that as a positive development for the dollar," he added.

A downside surprise "would reinforce the selling momentum that we've seen over the last 24 ⁠hours". Waller, ​an influential Fed governor, got in ⁠ahead of the data, however, saying on Tuesday that the central bank ought to raise short-term borrowing costs next month even if inflation cooled last month. And he said it ⁠should consider an upsized half-point rate hike if the inflation picture worsened.

Markets are now fully pricing a December rate hike from the Fed, upping expectations after those ​remarks. That gave the dollar a small lift, but traders were still cautious ahead of the data.

The euro was 0.1% lower at $1.1215, ⁠while the pound lost 0.15% to $1.3423. The dollar also gained around 0.2% on both the Japanese yen and Swiss franc, trading at 158.2 yen and 0.8209 francs, respectively.

That calm came after a ⁠dramatic ​couple of sessions in currency markets. A blowout October jobs report on Friday, with hiring more than twice the forecasts, sent the dollar surging, pushing the euro down 0.7%. That move then reversed on Monday, as a tumble in oil prices and gains for stocks knocked the dollar ⁠lower.

The trade- and sentiment-sensitive Australian dollar rose by nearly 1% through Monday to sit at $0.6918 on Tuesday and the New Zealand dollar gained even ⁠more, reaching $0.5634, with both fairly steady ⁠on Tuesday. The kiwi caught an extra boost as results from last weekend's election suggested the incumbent three-party coalition would stay in power, reducing uncertainty and the likelihood of any changes to the central bank's mandate.