Volatility explodes in currency markets.

US consumer prices increased 0.6% for January, above expectations of 0.5% with the year-on-year rate strengthening to a 40-year high of 7.5% from 7.0% and above consensus forecasts of 7.3%. Energy prices increased 27.0% over the year with a 40.0% increase for gasoline prices while food prices increased 7.0% since January 2021.

Underlying prices also increased 0.6% on the month with the annual rate at 6.0% from 5.5% which was slightly above expectations of 5.9% and the highest reading since September 1982.

There was a further 1.5% increase in used car prices for the month to give a 40.5% annual increase while apparel prices increased 5.3% over the year.

The data triggered big moves across asset prices.

There was a sharp shift in money-market expectations following the inflation data with markets pricing in a 50% chance of the Federal Reserve raising rates by 50 basis points at the March meeting. Futures markets also indicated that six rate hikes were likely this year while St Louis Fed President Bullard called for a 1% increase in rates by July.

Bond yields moved higher with the 10-year yield breaking above the 2.00% level for the first time since July 2019. The 10-year yield traded around 2.03% on Friday and the 2-year yield also increased very sharply to above 1.60%.

Market conditions had been relatively calm this week, but the US data triggered substantial moves. The dollar posted strong gains in immediate response to the inflation data with EUR/USD sliding to lows at 1.1375 while USD/JPY tested 5-year highs just below 116.35.

There was, however, a rapid reversal with EUR/USD surging to highs at 1.1495 on short covering and a panic liquidation of dollar longs while commodity currencies also registered a big reversal to trade higher on the day.

That was not the end of the drama, however, as the dollar then regained ground again and surged into the New York close while commodity currencies came under renewed pressure amid a slide in equities.

Higher yields fuelled further dollar gains on Friday with the currency index at 1-week highs.

After sliding at the open, Wall Street indices recovered strongly and briefly traded in positive territory. Selling dominated again into the close as higher yields and expectations of a more aggressive Fed stance eventually proved decisive in undermining confidence.

In this context, overall risk appetite deteriorated which provided some protection to low-yield currencies.

The tone from global central banks this year has been notably more hawkish, but the Swedish central bank did not follow the trend. The Riksbank held interest rates at 0.0% following the latest policy decision which was in line with market expectations.

The bank will, however, will hold second quarter asset purchases at current levels, contrary to expectations of a slower rate of buying. There was a divided committee with Governor Ingves forced to use his casting vote on bond purchases decision

The Riksbank is not forecasting a rate increase until the second half of 2024 with the Swedish krona losing ground.

Tentative trading conditions ahead of the US data were followed by a spike in volatility after the US CPI data. The dollar dipped sharply before surging again from late in Europe and posting 1-week highs.

ECB President Lagarde pushed back against higher interest rates which sapped Euro support. EUR/USD surged to highs at 1.1495 before a slide to around 1.1380 on Friday.

Higher US yields undermined the yen, but weaker equities provided some defensive support. USD/JPY settled just above 116.00 after failing to break 5-year highs at 116.35.

Sterling held a firm tone overall and EUR/GBP edged lower to 0.8410. GBP/USD took a dramatic round trip and posted 2-week highs above 1.3630 before a slide back to 1.3530.

AUD/USD surged from intra-day lows at 0.7150 to 0.7240 before more than reversing with a slide to 0.7120 as further dovish Reserve Bank rhetoric sapped support. USD/CAD dipped to 1.2650 as oil prices gained fresh traction before surging to 1.2750.

The Swedish krona slumped after the Riksbank policy decision with EUR/SEK surging to 16-month highs around 10.57.

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