Market Brief; North American Session: The CPI Day

US Dollar weakened on Wednesday, extending its recent corrective decline. The release of the December Consumer Price Index (CPI) report, which largely met market expectations, provided further impetus for the dollar’s weakness. This fueled speculation that the Federal Reserve may maintain its current interest rate stance, potentially opening the door for a rate cut later in the month.

The US Dollar Index (DXY) broke below the crucial 109.00 support level, indicating a shift in market sentiment. The December CPI data revealed a headline inflation rate of 2.9% year-over-year, slightly above the prior month’s reading. While the headline figure was slightly higher than anticipated, the core CPI, which excludes volatile food and energy prices, increased at a slower pace than in November.

This moderation in core inflation raised questions about the persistence of inflationary pressures and potentially reduced the need for further aggressive monetary tightening by the Federal Reserve. As a result, US Treasury yields declined across the curve, reflecting a diminished risk premium and a shift towards a more dovish monetary policy outlook.

The market is now awaiting key economic data releases, including US Retail Sales, weekly Initial Jobless Claims, and various regional manufacturing surveys. These reports will provide further insights into the state of the US economy and could influence market expectations for future Fed policy moves.

Meanwhile, other major currency pairs also experienced notable movements. The EUR/USD initially broke above the 1.0300 level but later pared some gains. The GBP/USD advanced for the third consecutive day, supported by a weakening US Dollar. The USD/JPY retreated significantly, hitting four-week lows, reflecting the marked decline in US Treasury yields.

In the commodity markets, prices for West Texas Intermediate (WTI) crude oil resumed their uptrend, trading near recent highs. Gold prices also gained traction, supported by the weaker US Dollar and declining Treasury yields.

Overall, the US Dollar weakened on Wednesday, driven by a combination of factors, including the softer-than-expected CPI data, declining Treasury yields, and a shift in market sentiment towards a less hawkish Fed.