US Dollar Outlook Improves After Stronger Than Expected US Inflation Data

January 11, 2024 - Written by David Woodsmith

STORY LINK US Dollar Outlook Improves After Stronger Than Expected US Inflation Data

US consumer prices increased 0.3% for December compared with consensus forecasts of a 0.2% increase with the year-on-year increasing to 3.4% from 3.1% and above expectations of 3.2%.

Core prices increased 0.3% on the month which was in line with expectations, although the year-on-year rate retreated to 3.9% from 4.0% and slightly above consensus forecasts of 3.8%.

There was a significant increase in rent prices with a 6.5% annual increase while insurance prices increased over 20% over the year.

Elsewhere, initial jobless claims declined to 202,000 in the latest week from a revised 203,000 previously and below consensus forecasts of 210,000.

Continuing claims also declined to 1.83mn from a revised 1.87mn.

Treasuries lost ground following the data releases with the 10-year yield increasing to around 4.06% from below 4.00% ahead of the data.

Given the Fed’s inflation mandate, the latest data will tend to make the central bank more cautious in cutting interest rates.

Following the data, the market pricing for a March rate cut declined to below 65% from 67% ahead of the data.

ING commented; “we suspect the combination of only modest core inflation declines and lingering labour tightness will prompt the Fed to push back on rate cuts more forcefully.”

According to the bank; “That is a dollar-positive development, on paper, but a market seemingly anxious not to miss out on the next big USD lower may impatiently sell dollar rallies.”

It added; “That is one of the reasons why our expectations for a short-term dollar rebound are modest: a clearer narrative that rate cuts before May are unlikely needs to take over before dollar bears can be discouraged.”

MUFG pointed to Federal Reserve rhetoric.

In comments on Wednesday, New York Fed President Williams stated that he expected interest rates would come down over time, but did not put any timeframe on a cut and insisted that the Fed would be data dependent.

According to MUFG; “The comments indicate he wants to become more confident that inflation is heading back to the Fed’s target on a sustained basis before lowering rates to less restrictive levels. While he now appears more open to lowering rates, it does not suggest that he is currently considering a rate cut as soon as in March.”

It added; “With the US interest rate market still pricing in around 18bps of Fed cuts by March, another softer inflation reading will be required today to meet expectations for an early rate cut otherwise the dollar will attempt to stage a relief rally.

Brian Coulton, chief economist at Fitch Ratings, commented; "This will give the Fed grounds for caution and they are unlikely to cut rates as quickly as the markets currently expect."

Stuart Cole, chief economist at Equiti Capital added; “I think it is not unreasonable for Powell to try and play down the prospect of a May cut too when he speaks at the FOMC press conference on 31 January.”

According to Scotiabank; “Beyond the CPI data, I still rather think broader risks are geared towards some strengthening in the USD in the next few weeks.”

Scotiabank added; “there is no indication that policy makers are even close to easing policy at this point, given ECB staff expectations that inflation could edge higher in the early part of this year.”

The bank noted the strong rejection close to 1.1000 and pointed to major support around 1.0920.

Goldman Sachs expects labour-market trends will be decisive in determining Fed policy and expects a rate cut around mid year.

It added; “Either way, the December inflation data is unlikely to change the overall dovish trajectory this year as material progress has been made. In our view, the dovish Central Bank tone, progress in inflation, decline in oil prices, and resilient, but loosening labor market are all positives for risk assets. We believe any inflation scare driven drawdowns should be bought.”

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TAGS: American Dollar Forecasts