UK inflation falls more than expected.

US consumer prices increased 0.5% in January, in line with consensus forecasts, although the year-on-year inflation rate was held to 6.4% from 6.5% and above expectations of 6.2%.

Core prices increased 0.4% for the month which was also in line with expectations with the annual increase at 5.6% from 5.7% and slightly above expectations of 5.5%.

Used car prices declined for the seventh successive month with an 11.6% annual decline. There were, however, monthly increases of 0.8% and 0.7% respectively for apparel and shelter respectively which maintained some concerns surrounding underlying trends.

Richmond Fed President Barkin stated that there is going to be a lot more persistence to inflation than we want and that there is a good case for leaving rates higher for a longer period of time. He reiterated that the risk of doing too much is outweighed by the risk of doing too little.

New York Fed President Williams stated that further rate hikes were needed and a 5.00-5.50% year-end rate was realistic.

Boston head Logan stated that the central bank must be prepared to keep raising rates longer than anticipated if needed. She also stated that tightening too little is the top risks and that there had been little evidence of improvement in core services inflation outside the housing sector.

Bond yields moved higher following the inflation data with the 10-year yield hitting 5-week highs around 3.78% before fading slightly.

There was also a shift in market Fed Funds expectations with markets pricing out rate cuts and now expecting that rates would be close to 5.00% at the end of 2023.

Higher US yields underpinned the dollar with the US currency recovering quickly from 10-day lows and posted net gains amid expectations of higher US rates for longer.

The headline UK inflation declined to 10.1% from 10.5% previously and below consensus forecasts of 10.3%. The underlying rate also dipped to 5.8% from 6.3% and below expectations of 6.2%.

The latest US retail sales data will be released on Wednesday with a strong rebound expected after the weak data for December.

The New York Empire manufacturing survey will also be released with some net improvement also expected after a very weak January reading.

The dollar was unable to make any impression ahead of Tuesday’s US open with the Euro edging higher. There was very volatile trading after the US inflation data. The dollar spiked higher before sliding rapidly with EUR/USD peaking just above 1.0800. Higher yields and weaker equities triggered renewed dollar gains with EUR/USD lows around 1.0710. EUR/USD settled around 1.0710 on Wednesday from lows just above 1.0700.

Higher US yields were crucial in undermining the yen. USD/JPY posted highs just above 133.30 before settling just above 133.00.

The Swiss franc lost ground as global yields moved higher. EUR/CHF advanced to 0.9890 with limited USD/CHF gains to 0.9235.

Sterling held firm on Tuesday amid expectations that strong wages data would force a hawkish Bank of England stance. Weaker equities sapped potential support for the Pound. GBP/USD posted highs at 1.2265 before a slide in volatile trading and settled around 1.2150. Sterling dipped after the UK inflation data with GBP/USD around 1.2100 and EUR/GBP advancing to 0.8850 after testing 0.8800 support on Tuesday.

Commodity currencies also registered choppy trading with net losses. AUD/USD surged to 0.7030 highs and then slumped to 0.6925. Reserve bank of Australian Governor Lowe stated that inflation was much too high. Another AUD/USD rally attempt also failed as it traded around 0.6910 on Wednesday. USD/CAD settled 1.3370 amid the firm US dollar tone.

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