Dollar slightly firmer

While there was some volatility immediately following the release of yesterday’s inflation data in the US, the main currency pairs are really not much changed from yesterday morning’s levels albeit with a slightly firmer tone to the dollar. EURUSD and GBPUSD are trading at about $1.1650 and $1.3450 respectively this morning (both also largely unchanged from where they closed at the end of last week), leaving EURGBP at around £0.8660. The yen continues to trend lower against the dollar, trading at its lowest level (just north of Y159) since July 2024.

With the US inflation data broadly in line with expectations, government bond yields in the main markets were little changed, ending flat to marginally higher (Japanese bonds were an exception, yields rising quite sharply, by 8-9bps, at the long end of the curve). In equity markets, as the Q4 earnings season gets underway, US and European stocks ended flat to slightly lower on the day. Meanwhile, in the oil market, prices continued to back up yesterday, reflecting the situation in Iran, with Brent rising above $65 p/b for a time (though it’s just below this level this morning).

Annual headline and core inflation in the US were both unchanged in December (from November), at 2.7% and 2.6% respectively, according to yesterday’s CPI report. Within core, goods and services inflation were also unchanged last month at 1.4% and 3% respectively. Core inflation is down from 3.2% in December 2024, with a tariff-driven increase in core goods inflation more than offset by a decline in services inflation over this period. The data had little impact on Fed rate expectations, with the market pricing in about 50bps of cuts in 2026.

Fed member Musalem says he expects inflation to converge “toward our 2% target over the course of this year”, noting that the latest  inflation reading is “encouraging in that respect.” He also thinks monetary policy is “well positioned right now, balancing both the expected path of the economy and the risks on both sides,” suggesting he sees no need for any near-term change in interest rates.

There’s a heavy enough schedule of US economic data today, including producer price inflation, retail sales, and existing home sales. The Fed publishes its latest Beige Book (ahead of its monetary policy meeting in a couple of weeks), while there are also a number of Fed members scheduled to speak over the course of the day.