What does Thursday's US inflation data tell us? Ulrich Leuchtmann, Head of Currency and Commodities Research at Commerzbank, analyzes why USD exchange rates did not make big jumps following the data release.
Where is the USD euphoria?
US consumer prices rose 0.3% in December compared to November on a seasonally adjusted basis. The average analyst estimate was for an increase of 0.2%. The underlying rate was 0.3% versus November, in line with the median estimate. It was not a big surprise, but rather a small deviation from the analysts' consensus, barely significant.
Shouldn't we have expected more USD euphoria? Ultimately, this result calls into question the image of a Fed that will (a) soon have room to cut rates and (b) use it boldly. Well, with his recent very dovish comments at the December FOMC press conference, Fed Chairman Jay Powell may have given some observers the impression that he is not the tough inflation fighter (sort of Paul Volcker 2.0) as he liked to present himself not long ago.
However, this possible new image of the Fed modifies the elasticity of the Dollar exchange rates to news about inflation. The less active the US monetary authorities appear in the fight against inflation, the less positive the high inflation data will be for the USD.
In fact, if monetary policy is perceived as too dovish, surprisingly high inflation can hurt the dollar. We are nowhere near that point. But Thursday's reaction in the currency market already points to a small image problem that the Fed is currently facing. It is something that will have to be followed closely in the near future.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
