U.S. Inflation Hits Near 40 Year High…What Next?

The consumer prices index (CPI) jumped to 7% year-on-year, up from 6.8% in November while matching the median forecast from economists surveyed by Bloomberg. Core inflation, which strips out volatile items like food and energy rose 5.5%, well above the 4.9% reported in the previous month. This hot report should provide investors further evidence of persistent US inflation and reinforce speculation over the Federal Reserve raising interest rates sooner than expected.

However, the market reaction was interesting as traders shrugged off the data. US equities rose, the dollar tumbled against most currencies and Treasury yields pulled back slightly despite US inflation rising at its fastest pace since June 1982. While the positive reaction to the report could be based around the figures matching estimates, they will still fuel expectations over the Fed taking action in the face of rising inflation.

The mighty dollar was not so mighty on Wednesday afternoon with the Dollar Index (DXY) sinking towards the 95.00 level. A solid breakdown below this support may trigger a decline towards 94.56.

US Dollar Index daily chart

A weaker dollar propelled the EURUSD above the 1.1370 resistance level. This breakout could signal a move higher towards 1.1460 and 1.1530.

EUR/USD daily chart

Looking at the USDJPY, prices tumbled lower with bears eyeing 114.50.

USD/JPY daily chart

Earlier in the week, we asked whether gold was in trouble…well the precious metal looks to be in a good place with bulls hungry for $1831. If the dollar remains shaky for the rest of the week and Treasury yields continue to retreat, this could provide the precious metal a tailwind to push beyond $1831.

Gold daily chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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Lukman Otunuga

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman provides in-depth analysis on the global currency and commodity markets and is often quoted by leading international media outlets such as: MarketWatch, CNBC, NASDAQ, Reuters, AFP, The Guardian and Yahoo. Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on a technical and fundamental analysis of the global currency, commodity, and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions