|

US Inflation Quick Analysis: Strong figures on all fronts cement Fed action, dollar set to bounce

  • The US reported a 7% in prices in 2021, as expected, triggering a dollar sell-off. 
  • Higher Core CPI at 5.5% supports a March rate hike from the Fed.
  • The dollar could move higher once Fed officials respond to the data.

The 40-year wait is over – inflation has hit 7%, the highest since 1982. That figure is what economists had expected, triggering a "buy the rumor, sell the fact" response. However, this headline inflation is set to cause a headache for President Joe Biden and Federal Reserve Chair Jerome Powell who has been recently renominated by the President. 

This political pressure will likely result in statements from Fed officials, about their determination to act. Several hawks have already come out in support of raising rates in March and also of an aggressive reduction to the Fed's balance sheet. It currently stands at nearly $8.8 trillion. 

However, Powell seemed calmer, focusing on a strong economy and refraining from promising imminent action. Can he stay silent after such a figure? His calm mood sent the dollar down on Tuesday and Wednesday's response to CPI is an extension of that move. 

Will the dollar continue lower? Powell will find himself under pressure to, at least, offer a tougher tone. Moreover, it is not only political pressure stemming from the headline, but also underlying prices that undermine the bank's calm.

The Core Consumer Price Index (Core CPI) hit 5.5%, above 5.4% expected. On a monthly basis, this figure that excludes volatile food and energy costs rose by 0.6%, exceeding estimates as well. The Fed focuses on core prices, and would have to respond to curb inflation. 

Overall, while the "buy the rumor, sell the fact" response makes sense in the short term, the accumulation of inflationary data such as this report and strong wage growth – 4.7% in 2021 – point to more aggressive Fed action. That would turn the dollar back up, potentially reversing recent gains. 

Premium

You have reached your limit of 3 free articles for this month.

Start your subscription and get access to all our original articles.

Subscribe to PremiumSign In

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Markets move fast. We move first.

Orange Juice Newsletter brings you expert driven insights - not headlines. Every day on your inbox.

By subscribing you agree to our Terms and conditions.

Editor's Picks

EUR/USD clings to small gains near 1.1750

Following a short-lasting correction in the early European session, EUR/USD regains its traction and clings to moderate gains at around 1.1750 on Monday. Nevertheless, the pair's volatility remains low, with investors awaiting this weeks key data releases from the US and the ECB policy announcements.

GBP/USD edges higher toward 1.3400 ahead of US data and BoE

GBP/USD reverses its direction and advances toward 1.3400 following a drop to the 1.3350 area earlier in the day. The US Dollar struggles to gather recovery momentum as markets await Tuesday's Nonfarm Payrolls data, while the Pound Sterling holds steady ahead of the BoE policy announcements later in the week.

Gold pulls away from session high, holds above $4,300

Gold loses its bullish momentum and retreats below $4,350 after testing this level earlier on Monday. XAU/USD, however, stays in positive territory as the US Dollar remains on the back foot on growing expectations for a dovish Fed policy outlook next year.

Solana consolidates as spot ETF inflows near $1 billion signal institutional dip-buying

Solana price hovers above $131 at the time of writing on Monday, nearing the upper boundary of a falling wedge pattern, awaiting a decisive breakout. On the institutional side, demand for spot Solana Exchange-Traded Funds remained firm, pushing total assets under management to nearly $1 billion since launch. 

Big week ends with big doubts

The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.

Solana Price Forecast: SOL consolidates as spot ETF inflows near $1 billion signal institutional dip-buying

Solana (SOL) price hovers above $131 at the time of writing on Monday, nearing the upper boundary of a falling wedge pattern, awaiting a decisive breakout.