The dollar dipped sharply following the data with a retreat to 2-month lows.

The headline US CPI inflation rate increased to 7.0% while the underlying rate was slightly above forecasts.  Risk appetite posted net gains after the data with some relief that the rate was not even higher.  Markets were more optimistic over the global growth outlook.

US bond yields edged lower after the data despite inflation concerns. Wall Street equities posted gains despite strong expectations of a March interest rates hike. Asian equities overall lost ground with further supply-side issues.

The dollar dipped sharply following the data with a retreat to 2-month lows. EUR/USD strengthened to 8-week highs near 1.1350 despite an unconvincing Euro performance. Sterling held firm with fresh 2-month GBP/USD highs as the dollar retreated. Commodity currencies posted 2-month highs on strength in energy and metals prices.

Eurozone industrial production increased 2.3% for November with a year-on-year decline of 1.5%.  ECB council member Villeroy stated that we are very near to the peak in inflation, although markets remained unconvinced over the central bank commentary on inflation. There was little impact from the data with caution prevailing ahead of the US inflation data while speculation over a shift in ECB policies this year continued to curb potential Euro selling.

US consumer prices increased 0.5% for December and marginally above consensus forecasts. The year-on-year inflation rate increased to 7.0% from 6.8% which was in line with expectations and the highest figure since 1982. Energy prices declined slightly on the month with a 29.3% increase over the year.

Underlying prices increased 0.6% on the month compared with expectations of 0.5% with the year-on-year rate increasing to 5.5% from 4.9%. This was slightly above market expectations of 5.4% and the highest rate since 1991.Used car and truck prices increased 3.5% on the month with a 37.3% annual increase while apparel prices increased 5.8% over the year.

Although the data overall was marginally above consensus forecasts, the dollar failed to gain any traction and selling pressure gradually increased into the European close. EUR/USD strengthened to 8-week highs just below 1.1450 as commodity currencies also posted strong gains.

The Fed’s Beige Book reported a modest expansion of activity across all districts while growth expectations moderated slightly. There was some evidence that bottlenecks were easing, but there was still strong upward pressure on wages as labour markets remained very tight.

The dollar was unable to regain ground on Thursday and retreated to fresh 2-month lows with EUR/USD holding around 1.1440 in early Europe as commodity currencies held firm.

The increase in Chinese new loans slowed to CNY1130bn for December from CNY1270bn the previous month and below market expectations. The total increase in social financing also slowed to CNY2370bn from CNY2610bn in November with markets continuing to monitor domestic coronavirus developments.

Although the US inflation data overall was slightly above market expectations, US Treasuries rallied after the data with the 10-year yield retreating to around 1.73%. There was a muted reaction in equities and USD/JPY initially retreated to near 115.00 against the yen.

Cleveland Fed President Mester stated that the case for a removal of accommodation is very compelling, maintaining expectations of a March rate increase, but the dollar failed to gain support. A break below the 115.00 level triggered further USD/JPY selling with a slide towards 114.50 before the pair stabilised.

Rhetoric from regional Fed officials remained hawkish with San Francisco head Daly commenting that she sees a rate hike in March while Philadelphia President Harker stated that 7% inflation is very bad and that he would be open to more than three rate hikes this year if required.

Asian equities were unable to make headway as Tokyo raised its coronavirus alert level and USD/JPY traded just above 114.50 with EUR/JPY just above 131.0.

Sterling held a firm tone in early Europe on Wednesday but was unable to secure further traction. There was speculation that higher yields have already been priced in and markets were also monitoring political developments closely with Prime Minister remaining under pressure as he was forced to apologise in the House of Commons.

International developments dominated during the day and overall global risk appetite held firm during the day with strong advances in oil and commodity currencies helping to underpin Sterling sentiment. GBP/USD pushed to fresh 2-month after the US inflation data with a move to test 1.3700, but EUR/GBP held around 0.8350.

Markets will continue to monitor political developments, although yield and risk trends are likely to dominate. Overall sentiment held firm on Thursday with GBP/USD just above 1.3700 while GBP/EUR traded just below 0.8350. Markets will be monitoring Bank of England rhetoric very closely in the short term ahead of February’s meeting.

Economic Calendar

09:00ECB Economic Bulletin
10:30ECB Luis De Guindos Speaks
13:30USD PPI Ex Food & Energy (M/M)(DEC, 2021)0.70%
13:30USD PPI Ex Food & Energy (Y/Y)(DEC, 2021)7.70%
13:30USD PPI (Y/Y)(DEC, 2021)9.60%
13:30USD PPI (M/M)(DEC, 2021)0.80%
13:30USD Initial Jobless Claims207K
13:30USD Continuing Jobless Claims1754K
18:00Fed President Evans Speaks
23:50JPY Buying Foreign Stocks17.1B
23:50JPY Buying Foreign Bonds416.5B

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.