Does Inflation Data Incite A New Forex Storm?

Major currency pairs were quite volatile on Thursday following the release of US inflation figures. The US Consumer Price Index soared to 7.5% YoY in January, higher than the 7.3% expected.

The core reading printed at 6%, also above the market’s forecast. The headline spurred a short-lived US dollar’s rally, although the greenback quickly changed course and moved from daily highs to fresh weekly lows against most of its major rival currencies.

The EUR/USD pair peaked at 1.1394, a fresh 2022 high, stabilizing at the 1.1460 price zone. Earlier in the day, the European Commission raised its inflation expectations for this year from 3.5% but is still expecting it to decline in 2023, seeing it at 1.7%.

Prices pressure was blamed on supply disruption and the energy crisis, exacerbated by geopolitical tensions between Russia and Ukraine. Also, Bundesbank Governor Joachim Nagel indicated that the European Central Bank might raise rates later this year.

The GBP/USD pair holds on to intraday gains just above the 1.3600 region after hitting a monthly high of 1.3643. Commodity-linked currencies were unable to hold on to intraday gains. The AUD/USD pair is marginally higher at around 0.7180, while USD/CAD is up for the day, trading at around 1.2700.

RBA Governor Philip Lowe will testify at a virtual hearing before the House of Representatives Standing Committee on Economics and may refer to the monetary policy.

Crude oil prices ended the day little changed. The OPEC boosted its forecast for 2022 crude demand by 100K barrels per day but reported that output rose by 64K bpd in January, lagging the pledged increase by OPEC+. WTI trades at $89.60 a barrel.

Gold jumped to $1,841.83 a troy ounce but retreated towards the current 1,830 region. Wall Street edged lower, with the DJIA shedding over 500 points. The poor tone of equities helped the greenback to recover some ground ahead of the daily close.

US Treasury yields soared. The yield on the US 10-year Treasury note soared to 2.02% above the 2% threshold for the first time since 2019, while the 2-year note yielded as much as 1.51%. Following the release of inflation data, the chances of a rate hike of 50 basis points in March rose to nearly 50%.