US inflation comes in as expected, headline dips below 2.0% on lower energy prices

Published date: 11/01/2019

This afternoon's CPI data out of the US has produced no surprises as the headline inflation rate has dipped from 2.2% to 1.9% as expected - lower Oil prices reflected in the latest released for Dec.   More significantly for the Fed, core inflation remains at 2.2% after another 0.2% rise last month, so from a demand perspective, this is positive news for the economy with real earnings also rising by more than the 0.3% expected - at 0.7%.  

Whether markets believe the Fed will remain on hold in a bid to ease tensions in the stock markets remains in the balance, as the FOMC will have to react to the data in the real economy.  On these latest numbers, we cannot rule out a flat year in terms of rate hikes as any strong growth in wages and spending will need to be curbed by rates if inflation does start to pick up again.  

The market is a caught between a rock and a hard place as a result, with little reaction if any to the data.  As such, currency traders will be focusing on the equity market open in the US in a little under an hour with yields on the longer end of the curve little changed.  

EUR/USD looks to have found support at 1.1480-85 for now and is reluctant to push aggressively either way after finding sellers well ahead of 1.1600.  The focus may turn to USD/JPY based on how stocks may react later, with the futures markets showing relatively modest losses on the open.

We, therefore, could see AUD and CAD also start to give back some their recent gains, with both respective spot rates overbought/sold on short term metrics. 

GBP looks to be the darling of the market for now, with the early reports (since denied) that Brexit may be delayed.  Even so, the seeds of doubt have been planted despite volatility anticipated around next weeks key vote.  1.2850-1.2900 will be a tough area to crack, though the dip back under 1.2800 has been swiftly reversed.


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