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The US dollar had quite a few good weeks but seems to hesitate after the recent gains. Markets seem to be looking for a new direction.

The recent sticks in the wheels of the dollar rally came from the Federal Reserve. Charles Evans of the Chicago Fed went back to his dovish self. Evans, which votes in 2017 said it is “too early to call on a December hike”.

In addition, he said that inflation is “disappointingly low” and he will need to see substantial progress on inflation before moving forward.  Also, he wants to see inflation rising to 2% as quickly as possible. He seemed quite worried about the situation.

His comments come on top of relatively dovish meeting minutes from the FOMC, albeit leaving the door wide open for a December rate hike.

The Fed has been claiming that lower inflation is only “transitory”, but Yellen then talked about a “mystery“. Are they having bigger doubts now?

What could prevent the Fed from raising rates in December?  

In one word: inflation. Today’s we’ll get the Producer Price Index, which serves as a warm-up towards the big thing: CPI on Friday. Core CPI is stuck at 1.7% for quite a few months. The Fed focuses on the Core PCE, but the Core CPI is published earlier and it certainly a market mover.

If we get a drop under 1.7% y/y, the dollar could turn south. EUR/USD has already been drifting higher but still remains some 200 pips below the highs of 1.2090 and also some 200 pips above the lows at 1.1690.

All in all, markets are in a wait and see mode.