Dollar firmer post US inflation data

The dollar strengthened, bond yields rose, and the wind was taken out of the sails of equity markets after yesterday’s firmer than expected US inflation readings, which have led the market to push out the timing of a first full quarter point rate cut by the Fed to July with not much more than 75bps worth of  policy easing now expected by the end of 2024. The dollar is trading at around $1.07 to the euro and at about $1.2550 to the pound, with the latter under a little pressure after the release of UK inflation data earlier this morning, leaving EURGBP at £0.8525.

Government bond yields rose further post the inflation data, led by the US with 2- and 10-year Treasury yields ending around 20bps and 15bps higher respectively. UK yields have fallen back at the open today though, following this morning’s data. In equity markets, meanwhile, US and European stocks both shed more than 1% yesterday.

The US CPI data showed the annual rate of headline inflation falling to 3.1% in January (from 3.4% in December) and the core inflation rate remaining at 3.9%, both firmer than the consensus forecast of 2.8% and 3.7% respectively. Moreover, core consumer prices rose by 0.4% in January, the largest month-on-month increase since April last year.

This morning’s UK inflation data were a little softer than the consensus forecast. The headline and core rates remained at 4.0% and 5.1% respectively in January (versus 4.1% and 5.2% expected), while goods inflation eased to 1.8% and services inflation nudged up to 6.5% (lower than the 6.8% expected). The Bank of England noted earlier this month that headline CPI inflation “may tick up slightly in January’s number…but by the time we get to March, we think inflation will be around 3% (and) in April, May and June we expect inflation to be close to the 2% target before increasing somewhat over the second half of the year.”

Economic data due today include Euro area GDP and employment for Q4 – the preliminary GDP release showed the economy stagnated in the final quarter of last year after contracting slightly in Q3, thus narrowly avoiding recession  – as well as industrial production for December.