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US Dollar Rises as Inflation Pressures Appear on the Horizon

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September's Producer Price number departs from two previously dissapointing figures and could suggest that underlying inflation pressures are beginning to emerge in the US. 

The US Dollar pared losses and then gained ground on some of its rivals during noon trading Thursday after producer prices were shown rising at a much faster pace than was expected during September.

Producer prices rose by 0.4% during the month, faster than the 0.2% growth forecast by economists, which makes for annual producer price inflation of 2.6%. This is the fastest pace of producer price inflation since February 2012, according to the Bureau of Labor Statistics report.

Core producer prices, which strip out the cost of volatile items like food and energy, also rose at a noteworthy clip. Core producer prices gained 0.2% during the month, making for annualised price growth of 2.1%.

The pass-through from producer prices to consumer prices is rarely immediate but it does often signal developments in the pipeline, hence why the data is net-positive for the Dollar.

The Pound-to-Dollar rate extended losses in response to the report, trading down 0.72% at 1.3142 for the session overall. Meanwhile, the Euro-to-Dollar pair extended losses by around 20 points to be quoted at 1.1840, making for an intraday loss of -0.14%.

The September producer price number depart from two previously dissapointing figures and could suggest that underlying inflation pressures are beginning to emerge in the US. 

All eyes now turn to the main event in the US calendar this week which is the release of consumer price inflation and retail sales figures, due out Friday at 13:30 London time.

"More importantly for the dollar and near-term price action, will be tomorrow’s inflation report, which should set the tone into the weekend," says Richard Kelly, Head of Global Strategy with TD Securities.

September's US consumer price index, a more important measure of inflation, is forecast to rise by 0.6% for the month. This is while the all-important core-CPI measure is seen rising by around 0.2%. Headline and core retail sales are seen growing 1.7% and 0.9% respectively. 

Thursday's data come closely on the heels of September's FOMC meeting minutes, which showed policymakers once again puzzling over an apparent absence of inflation pressures, given that unemployment has fallen to near record lows. 

While Federal Reserve officials continue to indicate they will push ahead with a gradual increase in the Federal Funds rate regardless, fears are that other factors not currently on the central bank radar may be weighing on inflation.

Further commentary on US inflation is likely when Federal Reserve speaker, and Fed Chair candidate, Powell participates in a panel discussion at an International Monetary Fund event in Washington Thursday. Rate setter Brainard will also appear on the same panel alongside European Central Bank chief Mario Draghi. 

The greatest threat to long term interest rate expectations is that these fears of hidden factors weighing on inflation are well founded and that the weighing factors are not "transitory", but are permanent. 

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