Dollar index mostly flat after higher-than-expected U.S. CPI

Consumer prices in the U.S. climb 0.3%, ahead of Wall Street forecast

The U.S. dollar gained against the euro and Japanese yen on Thursday following a higher-than-expected consumer inflation reading n in December that surpassed economists' forecasts.

The headline Consumer Price Index (CPI) recorded a 0.3% increase last month, according to data released by the Bureau of Labor Statistics on Thursday. The CPI climbed 3.4% year-over-year, exceeding expectations of the monthly (0.2%) and yearly gains (3.2%), respectively.

Core CPI growth — a metric that excludes volatile food and energy indices and is generally considered a better gauge of underlying trends — dipped to 3.9% year-over-year in December from the 4% recorded in November. Economists had predicted a slight decrease in the year-over-year gain for the core CPI to 3.8% last month.

The U.S. dollar index (DXY) traded 0.3% higher after the data was released, peaking at a six-day high of 102.76 (compared to approximately 102.20 before the release) and later giving up its gains.

The dollar also surged against the euro, driving the EUR to USD exchange rate down by close to 0.4%, but retracted as the session went on, erasing most of its gains. EUR/USD last stood at $1.0975. The greenback was on similar trajectory against the Japanese yen, with the USD to JPY rate reaching 146.34 and eventually falling to 145.

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US inflation: Housing prices drive consumer price increases

A significant portion of the monthly increase in the headline CPI was attributed to the surge in housing prices. In December, the bureau's index for shelter increased by 0.4%, contributing to over half of the overall monthly inflation rate. Car insurance and medical care also saw upward movements.

Even energy prices saw an uptick, as the gasoline index in December rose by 0.2%. However, when not seasonally adjusted, gasoline prices recorded a decline of 5.8% in the same month.

Federal Reserve: Higher-for-longer party gets another argument for later interest rate cuts

In his morning notes on Thursday, Markets.com Chief Market Analyst Neil Wilson wrote that markets had indeed expected a 3.2% or 3.3% increase in year-on-year headline CPI — anything less would have fueled the dovish argument, according to the analyst:

“[...] the headline for December is expected to tick back up to 3.2%, perhaps 3.3% wouldn’t be a surprise, whilst the core is seen declining to 3.8%, or 3.9%. That is the kind of range of no surprise that would probably leave the market thinking that a March cut is looking less and less likely...anything sub would bolster the dovish take”.

Traders betting the Federal Reserve will be reluctant to cut U.S. interest rates as fast as markets have priced in got a boost from the data, according to Giuseppe Sette, president of AI-based market research firm Toggle AI. In an email cited by MarketWatch, he wrote:

"The 'higher for longer' party has received one more bullet in its banderole: with CPI marginally higher than expected (+0.2% for headline, +0.1% for core) it becomes harder for the Fed to say that inflationary pressures have been tamed, especially in the face of a strong job market.

For the entire history of the Fed, rates have always been kept considerably above inflation in any scenario short of a recession. This CPI print pushes the first rate cut further away, possibly not even in 2024".

US interest rates: Commerzbank says Fed will wait until May to start cuts

After the data release, economists at Frankfurt-based Commerzbank wrote that the data did little to change the “gradual downtrend in inflation”, with the bank expecting the Federal Reserve to start cutting rates in May instead of March:

“US consumer prices rose by 0.3% in December compared to November, both overall and excluding the volatile prices for energy and food. This was slightly more than expected but does little to change the gradual downward trend in inflation.

What is important for the Federal Reserve is that the last mile in bringing inflation back to target appears to be more difficult. We, therefore, feel confirmed in our assessment that the Fed will not cut interest rates in March, as the market expects, but only in May”.

In a note cited by Barron’s, Lindsay James, an investment strategist at Quilter Investors, wrote:

"This data print will be a warning to financial markets that have been punchy in the scale of rate cuts expected this year”.

Three rate cuts signaled by the Fed are "looking increasingly more likely”, the analyst added

At the time of writing on January 12, the DXY dollar index traded at 102.32, trading mostly sideways. The index is currently up close to 1% since the start of the year.

When considering foreign currency (forex) and indices for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.