Published on 13.01.2023 11:05

The dollar tumbled to a nearly nine-month low against the euro yesterday after data showed U.S. inflation was finally coming down, leading to speculation that the US Federal Reserve will be less aggressive with rate hikes going forward.

U.S. data showed the consumer price index fell by 0.1% last month, marking the first decline in the data since May 2020, when the economy was under serious pressure from the effects of the Covid 19 pandemic.

This has forced the U.S. central bank to undertake fastest monetary policy tightening cycle since the 1980s to reign in record inflation which until recently was sitting at its highest level in over 40 years. The aggresive move to hike rates seems to be working and the Fed may be now able to deliver fewer and reduce the size of the rate hikes going forward.

“Three months of relatively lighter core inflation figures are starting to form a trend, one that could spur the Fed to slow the pace of tightening further on February 1,” said Sal Guatieri, senior economist at BMO Capital Markets.

Fed policymakers expressed relief that price pressures were easing,  but they signaled the central bank’s target rate was still likely to rise above 5% and stay there for some time despite market bets the the rate cycle will end below 5 percent.

Following the CPI report, the dollar fell by more than 1% against the euro marking its lowest level against the European currency since early April.

The euro received another boost after hawkish comments from several European Central Bank officials, with four on Wednesday calling for additional rate increases which will narrow the yield between the euro and the greenback

“Our expectations are for another 125 basis points of rate hikes from the ECB and stay there until 2024,our core views for Fed policy versus ECB policy would be for a stronger euro-dollar through the year" said Chris Turner, global head of markets at ING in London.

Looking further ahead today, the main drivers of the Euro/USD currency pair will be the release of Industrial production figures from the Eurozone which are a key indicator of business comments and there should be further support for the Euro if the numbers come in strongly.

Later on in the American session traders will await the release of the Michigan consumer sediment index from the US which should create some volatility in the currency pair to close out the trading week.


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