US inflation declines further.

US consumer prices declined 0.1% for December compared with expectations of no change while the year-on-year inflation rate declined to 6.5% from 7.1%. This was in line with expectations and the lowest reading since late 2021. Food prices increased 10.4% over the year while energy prices increased 7.3% after a sharp monthly decline of 4.5%. Gasoline prices fell sharply on the month and also posted a slight net decline on the year.

Underlying prices increased 0.3% on the month with the year-on-year rate declining to 5.7% from 6.0% which was in line with consensus forecasts. There was another sharp decline in the cost of new vehicles, but there was a strong monthly increase in shelter costs with a 7.5% annual increase.

Following the US data, markets priced in over a 90% chance that the Federal Reserve would limit the February rate hike to 25 basis points.

Philadelphia Fed President Harker stated that it was now appropriate to raise rates by 25 basis points going forward, although the base case was still for a few more rate hikes this year. Atlanta head Bostic also commented that he would be happy with 25 basis-point hikes if business contacts confirm slower inflation.

Markets priced in over a 90% chance that there would be a 25 basis-point hike for February.

Risk assets posted further gains after the US inflation data with gains in equities, oil prices and precious metals. There was a retreat from intra-day highs with a lot of potential good news already priced in.

The dollar was subjected to violent swings after the US inflation data. The dollar index dipped sharply to fresh 7-month lows before attempting regain ground amid pressure for a correction.

The US currency subsequently dipped to another 7-month low with selling on rallies, especially against the yen.

The Bank of Japan intervened twice during the Asian session to cap bond yields. Markets still expect that the central bank will adjust policy this year and the yen posted strong gains with USD/JPY sliding to 7-month lows below 128.50.

Bank of England MPC member Mann maintained a hawkish stance with comments that underlying inflation looks pretty robust with the risk of secondary inflation pressures. She expects that rates will need to increase further and there is no risk of over-tightening at present.

UK GDP recorded a 0.1% increase for November compared with expectations of a 0.2% decline with some support from the World Cup.

The dollar spiked lower following the US consumer prices release with the currency index sliding to fresh low. Lower US yields sapped support for the dollar. EUR/USD jumped initial highs just above 1.0835. Position adjustment triggered a sharp recovery with a EUR/USD slide to lows near 1.0750.

Lower German yields curbed Euro support to some extent. The dollar still endured another round of sharp selling with fresh 7-month EUR/USD highs at 1.0865 before settling around 1.0835 on Friday. The yen posted sharp gains after the US data. USD/JPY initially re-tested 7-month lows fractionally above 129.50. The yen maintained a strong tone despite Bank of Japan bond buying. USD/JPY posted further losses to fresh 7-month below 128.50 on Friday.

The Swiss franc lost further ground on a lack of support for defensive assets, but recovered from intra-day lows. EUR/CHF hit fresh 6-month highs around 1.0100 with USD/CHF around 0.9315.

Overall Sterling sentiment remained fragile despite potentially positive developments. After a surge to 1.2240, GBP/USD posted sharp losses to 1.2100 before rallying again to near 1.2200 in choppy trading.

Commodity currencies posted sharp gains on the US CPI data before being hit by a substantial correction. AUD/USD surged to 4-month highs above 0.6980 before a sharp correction with a fresh rally to 0.6965 on Friday amid hopes for a stronger Chinese economy. USD/CAD dipped to 1.3350 lows and settled around 1.3375.

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