Solid US CPI sees rates move higher

The latest US CPI data showed us that the headline rate for prices rose 6.4% in January – a small slowdown from the prior month but higher than economists had predicted. The core annual figure also came in mildly stronger than expected but still lower compared to the prior readings, while the monthly prints hit the consensus estimates.

However, a core reading of 0.4% is still too strong for the Fed whose inflation target is 2%.

Economists believe an increase of around 0.17% is needed over time to hit this key objective.

A bumper US jobs report had stoked fears of stronger-than-expected numbers all round. So the data does suggest a slowing at least in the falling price pressures that we have seen over the past few months from last year’s high above 9%.

The “super core” number which excludes housing and is Powell’s key variable, remains uncomfortably high and is consistent with another couple of smaller rate hikes. Concerns about the tight labour market may also linger while the new seasonal adjustment is likely to be modestly inflationary.

DXY still stuck in a range

In which light, after some initial selling in the greenback immediately after the data, USD clawed back all its intraday losses and finished marginally in the green on the day.

Importantly, US Treasury yields also rebounded strongly from their initial move with the 10-year hitting levels not seen since the start of the year close to 3.80%.

Money markets have pushed the Fed funds terminal rate higher by a few basis points and it now stands around 5.27% in July.

There is now less than a 25bp rate cut priced in by the end of the year.

The dollar index, measured against six of its major trading partners, has rebounded this month after dropping to a multi-month low at 100.82 at the start of February.

The scarcely believable headline NFP print at the start of the month encouraged more buying, but prices have hit a long-term resistance zone between 103 and 104. This includes the pandemic spike high at 102.99 and the top from January 2017 at 103.82, as well as the 50-day simple moving average at 103.22.

The index dipped intraday yesterday and made an intraday low at 102.58 but buyers quickly stepped in. The longer prices track sideways, the stronger the breakout and range expansion will be.