The U.S. consumer price index (CPI) jumped 7% year-on-year, matching the median forecast from economists surveyed by Bloomberg and up from 6.8% in November. Core inflation, which strips out volatile items like food and energy, rose 5.5%, well above the 4.9% reported in the previous month.
Markets initially offered a calm reaction to the hot report with Wall Street closing modestly higher on Wednesday. The most notable price action was seen in FX markets, with king dollar breaking down as Treasury yields pulled back, while gold bugs were injected with renewed confidence. The December CPI report has presented further evidence of persistent price pressures, especially with inflation registering its biggest annual gain since 1982.
As expectations intensify over the Fed raising interest rates as soon as March, this may weigh more heavily on global stocks. while supporting the dollar and Treasury yields in the medium term. Given how markets remain sensitive to comments from Fed officials, today could see more volatility with numerous Fed speakers on the roster.
Dollar Index (DXY) slams into 95.00
The dollar tumbled to a two-month low against a basket of currencies yesterday after the inflation figures for December matched expectations. Investors may have seen this data as bearish for the world’s reserve currency as they were possibly expecting the figures to be even hotter. Nevertheless, the headline surged 7% last month, its biggest year-on-year increase since June 1982 and seven of the last nine releases have now come in above consensus. Traders are currently pricing in an 84% probability of at least one rate hike by mid-March 2022.
Looking at the technical picture, the Dollar Index remains under pressure on the daily charts. A breakdown below 95.00 could open the doors towards 94.56 and 94.00, respectively.
Commodity spotlight – Gold
After notching its sharpest weekly loss since November, gold bulls have returned with a vengeance this week.
The precious metal continues to draw strength from a weaker dollar and slight pullback in Treasury yields with prices trading around $1826 as of writing. Inflation risks could also be supporting upside gains for gold which has often been considered a hedge against rising prices. With inflation in the United States jumping in December, this could encourage some investors to hold onto their gold investments.
However, the precious metal is certainly not out of the woods yet. The zero-yielding asset tends to perform poorly in a high interest rate environment. So, with the Fed expected to hike as soon as March, the road ahead for gold bugs could be filled with bumps and obstacles. On top of this, the dollar may regain its mojo on rate hike bets with Treasury yields pushing higher. Should this become a reality, gold could be in store for fresh pain down the road.
Technically, the precious metal has the potential to push higher towards $1845 if a daily close above $1831 is achieved. Alternatively, a decline back below $1810 could prices move lower towards $1800, $1786 and $1770.
For a look at all of today’s economic events, check out our economic calendar.
By Lukman Otunuga Senior Research Analyst
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