US rates, dollar hit new highs on hot inflation

CPI beats expectations, USD soars

January Consumer Price Index (CPI) inflation data has presented an unexpected turn, exceeding forecasts by 0.2%. Headline inflation came in at a persistent 3.1% and core inflation held firm at 3.9% on a year-over-year basis. These figures suggest that inflationary pressures are more tenacious than previously anticipated, potentially altering the course of monetary policy and impacting markets.

The immediate reaction to the CPI report was a surge in the value of the US dollar (USD). USD/JPY soared by over 100 pips, reaching 150.00 – a level not seen thus far in 2024. This indicates a strengthening of the US dollar against a basket of currencies, as investors flock to the perceived safety of the dollar in uncertain economic times.

How inflation is affecting rates

The bond market has also felt the ripple effects of the CPI data, with Treasury yields hitting a two-month high. The benchmark 10-year yields climbed past the 4.25% mark, reflecting a shift in investor sentiment towards expecting higher interest rates for longer to combat persistent inflation.

Given this environment, the likelihood of a US interest rate cut in the near future has dwindled, with expectations for an adjustment at the upcoming May Federal Open Market Committee (FOMC) meeting now falling below 50% (CME FedWatch tool). This shift in expectations can have significant implications for traders, as interest rate policies are a key driver of market movements.

Will USD reach new highs?

The question many traders are now contemplating is whether the US dollar can continue its ascent to reach 30-year highs. With USD/JPY only about 150 pips shy of this extreme, traders are closely monitoring economic indicators and geopolitical developments that could influence this trajectory.

For traders, these are times that require vigilance and adaptability. The ability to interpret economic indicators and their potential impact on markets is critical. Strategic positioning in currency pairs like USD/JPY, as well as in interest rate-sensitive instruments, can offer opportunities amidst the volatility.