A falling trend in US inflation continued in December. The reductions in core and headline CPI were in line with forecasts, driving a choppy reaction on forex.

US CPI inflation falls again

Inflation in the US continues to fall. Both headline and core CPI measures fell year-on-year. The headline CPI has now fallen for six months in a row, to levels not seen since October 2011. The core CPI has fallen for three months in a row and is sitting at a level not seen since December 2021. The data was broadly in line with expectations.

Here is the data:

  • US CPI (MoM) fell by -0.1% (0.0% exp, +0.1% in November)
  • US CPI (YoY) fell to 6.5% (6.5% exp, +7.1% in November)
  • US Core CPI (MoM) increased by +0.3% (+0.3% exp, +0.2% in November)
  • US Core CPI (YoY) reduced to 5.7% (5.7% exp, 6.0% in November)

Also of note was that the headline CPI posted a month-on-month decline since May 2020 (around two and a half years). 

What does this mean?

Inflation continues to fall in the US however, the Federal Reserve continues to put out a hawkish message to markets: “The job is not done yet”. The message from the consensus on the FOMC remains that rates will continue to be increased (maybe above 5% from the existing 4.50%) and will stay there for some time.

Despite this, the hard economic data (and soft data such as the ISM Services Prices Paid) continues to show prices are falling and inflationary pressure is receding. Markets continue to be positioned for the Fed being the first to blink (even if the FOMC’s Neel Kashkari insists that the Fed will win the game of chicken).

Fed funds futures have dropped again since the US CPI data. The market is pricing for a terminal rate of under 5% (c. 4.90% currently)

Furthermore, the prospect of a 25bps rate hike in the February meeting is becoming increasingly likely. According to the CMEGroup FedWatch tool, the probability of a 25bps hike stands at around 86%.

Markets continue to test the Fed’s resolve. The more that inflation continues to fall, the more this will continue. 

Initial Market Reaction

After months of softer-than-expected US CPI, the knee-jerk reaction was USD positive. However, this USD positive move was fleeting and there has been a sharp decline in USD once more.

These moves are reflected in EUR/USD spiking lower to then move around +80 pips higher. We have also seen commodities moving higher along with a rebound coming through in US index futures.

This US CPI data confirms existing expectations. Although the move has been choppy, there is a renewing USD negative bias coming through. There is volatility but a sustaining USD negative move seems set to take hold again. Any USD rebounds look to be another chance to sell.This is showing decisively in USDJPY which has fallen sharply. 

  • EUR/USD has moved above key resistance at 1.0785 (the May 2022 key high). If the move can hold then it would be bullish and open for moves above 1.0900.
  • Gold has tested $1900 but is now retracing. However, holding above support between $1880/$1886 would sustain the bullish move for pressure on $1910. 
  • S&P 500 futures have been less decisive. The futures have spiked around and are now broadly back to where they started.

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