Dull USD Action After Stronger CPI Suggests Markets Not Trading Inflation Anymore

Markets had been waiting all week for the CPI report from the US, which was released yesterday. Expectations were for a strong reading which didn’t disappoint. The report was even stronger than expected, which should have been hawkish for the USD, but the market reaction has not been as expected.

The early rise in the dollar and decline in equities faded pretty soon. In particular, the fixed income market appears to be dismissing concerns. US 10-year Treasury yields jumped 10 points higher, rising above 4%, but then reversed back down below that threshold, pulling the USD down as well, which finished the day little changed.

So, the price action in the USD yesterday showed that markets are convinced that inflation is not a problem anymore, and it will continue to slip lower eventually. This view was reinforced by comments by Richmond Fed President Barkin, who stated that he wants to be convinced that inflation is returning to target and that he is willing to cut interest rates as soon as inflation is on course toward the 2% target. However, FED member Mester who is close to president Powell made some hawkish remarks later, however, USD traders ignored them.

FED Member Loretta Mester Remarks on the CPI Numbers

• December CPI report shows the job is not done yet
• Inflation today is in a much better place than a year ago
• Today’s inflation report doesn’t change my view on where the Fed is headed
• Forecasts that we will continue to see inflation fall this year
• We will not get to the 2% target this year
• The Fed is in a good spot to assess as data comes in
• This report doesn’t tell us that inflation progress has stalled out but it tells us we have more work to do
• Contacts say labor market is still tight but not as tight as before
• March is too early for rate cuts, in my estimation
• We are not there yet to cut rates, we want more evidence the economy is progressing as expected

EUR/USD Live Chart