Global financial markets will be focusing on the release of US economic data tonight, particularly the Producer Price Index (PPI) data for November which is scheduled to be released at 9.30pm, Wednesday.
This data is seen as an important early indicator of inflationary pressures at the producer level, in addition to being the Federal Reserve's (Fed) main reference in setting the direction of monetary policy.
Economists expect the November PPI reading to remain stable at 2.7%, the same as the previous month.
If this data is in line with expectations, the market is likely to remain cautious of the USD's more flat movement, in line with the Fed's approach of still choosing to wait and assess more data before making any interest rate changes.
However, if the PPI records a higher-than-expected reading, it could revive ongoing inflation concerns. This is expected to support the USD's strengthening, as well as prompt the Fed to maintain a more hawkish monetary policy tone ahead of the FOMC meeting on 29 January.
On the other hand, a lower-than-expected PPI reading would reinforce expectations that inflationary pressures are easing, thus paving the way for a more dovish Fed tone and putting pressure on the USD in the short term.
In addition to the PPI, investors will also be focusing on the US Retail Sales data for November, which is forecast to have increased by 0.5%, compared to the previous reading. This data is important in measuring the strength of consumer spending, which is the main engine of US economic growth.
If retail sales record a higher-than-expected reading, it would signal that domestic demand remains strong, thus supporting the USD and strengthening the Fed's justification for keeping interest rates high for longer.
This situation could reduce the probability of a rate cut in the near term.
On the other hand, a lower-than-expected retail sales reading would raise concerns about the momentum of US economic growth
This situation has the potential to weaken the USD and increase speculation that the Fed may need to ease monetary policy sooner to support growth, especially if accompanied by signs of slowing inflation.
Overall, tonight's combined PPI and Retail Sales data are expected to play a key role in shaping market expectations for the Fed's decision and policy tone at the January 29 FOMC meeting.
Any surprise from expectations has the potential to trigger significant volatility in USD movements as well as global financial markets.
