US CPI inflation data was broadly in line with expectations.

US CPI inflation data was broadly in line with expectations which provided an element of relief given speculation over the threat of a higher reading. Risk appetite strengthened following the data, although there were still major uncertainties over Omicron developments.

Wall Street equities posted firm gains following the data with the S&P 500 index posting a fresh record close. Asian markets were able to make headway on Monday, but with cautious sentiment. US bond yields moved lower on hopes that inflation pressures would be contained.

The dollar lost ground following the data amid a slight scaling back of Fed tightening expectations, but edged higher again on Monday. EUR/USD edged back above 1.1300 before trading just below this level on Monday. Sterling was hampered by notable Omicron concerns, but vaccination efforts provided some relief with GBP/USD above 1.3200.

Commodity currencies secured a tentative net advance as the US dollar edged lower before fading again on Monday.

The Euro drifted lower ahead of Friday’s New York open with EUR/USD retreating to near 1.1270 against the dollar amid inevitable caution ahead of the latest US inflation data.

US consumer prices increased 0.8% for November after a 0.9% increase the previous month and marginally above consensus forecasts of 0.7%. The year-on-year rate increased to a fresh 29-year high of 6.8% from 6.2% and met expectations. Food prices increased 6.1% over the year while gasoline prices increased over 58%.

Core prices increased 0.5% which met expectations and the year-on-year also met market expectations with an increase to 4.9% from 4.6%. Used car and truck prices increased 31.4% over the year while the increase in shelter prices was held to 3.8%.

Although the data was broadly in line with expectations, there had been some concerns that the headline data would push above the 7.0% level. In this context, there was a slight element of relief and position adjustment with the dollar losing some ground into the New York close. Overall, the EUR/USD recovered to above the 1.1300 level.

CFTC data recorded a net decline in short Euro positions to just below 10,000 contracts. EUR/USD edged lower to near 1.1280 on Monday with the Federal Reserve still expected to adopt a hawkish tone this week, although relatively narrow ranges prevailed ahead of key central bank meetings this week.

The dollar posted net gains ahead of the New York open with expectations of a strong US CPI release. US Treasuries rallied after the US CPI inflation data with the 10-year yield retreating to below 1.48%. USD/JPY dipped from highs around 113.75 before the data to just below 113.50.

The University of Michigan consumer confidence index strengthened to 70.4 for December from 67.4 previously and above consensus forecasts of 67.1. There was a small improvement in current conditions and a larger recovery in the expectations component while the 1-year inflation expectations index was unchanged at 4.9%.

The dollar was unable to regain ground later in the session and USD/JPY consolidated around 113.40 despite further gains on Wall Street.

CFTC data recorded no change in yen positioning for the latest week, maintaining the potential for a squeeze and yen gains if US yields decline further.

The Japanese fourth-quarter Tankan business confidence index was unchanged at 18 for manufacturing while there was little change in services amid reservations over Omicron developments.

Overall risk conditions were little changed in Asia with a high degree of uncertainty over the outlook for the global economy and asset prices, especially given reservations over the Chinese outlook. USD/JPY traded just above 113.50 with EUR/JPY around 128.20.

Sterling was resilient in early Europe on Friday despite the generally weaker than expected data and a significant miss for the GDP release. GBP/USD was again able to find support below 1.3200 and traded just above this level.

The UK consumer inflation expectations survey recorded an increase in the 1-year expectations rate to 3.2% from 2.7% in August while the longer-term expectations index edged higher to 3.1% from 3.0%. There was a further downgrading of expectations surrounding a Bank of England rate increase at this week’s policy meeting with money markets pricing out the potential for a rate increase given uncertainty triggered by the Omicron variant.

A UK government spokesman stated that some progress had been made on the Northern Ireland protocol, although the market was focussed elsewhere.

Overall, GBP/USD posted a net advance to 1.3270 with GBP/EUR rallied to 1.1720.

CFTC data recorded no significant change in the latest week with funds continuing to hold a substantial short Sterling position. The UK currency dipped sharply at the Asian open following Prime Minister Johnson’s declaration of an Omicron emergency. The move to intensify booster vaccinations helped curb potential selling pressure to some extent with hopes that damage would be contained, but GBP/USD drifted lower again to trade around 1.3230 in early Europe.

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