US Dollar Weakened Following CPI Data

The US Dollar weakened on Wednesday following the release of the December Consumer Price Index (CPI) report, which showed a milder-than-expected rise in inflation. This tempered expectations for further aggressive interest rate hikes from the Federal Reserve, prompting a reassessment of the economic outlook and a cautious shift in market sentiment, benefiting US stocks and gold prices.

Headline CPI increased by 2.9% year-over-year, slightly above the prior month’s reading. However, core CPI, which excludes volatile food and energy prices, increased by 3.2% year-over-year, a deceleration from the previous month’s 3.3%. This moderation in core inflation raised questions about the persistence of inflationary pressures and potentially reduced the need for further aggressive monetary tightening.

The softer-than-expected inflation data triggered a decline in US Treasury yields, reflecting a diminished risk premium and a shift towards a more dovish monetary policy outlook. The 10-year Treasury yield retreated from recent 14-month highs, signaling a reassessment of interest rate expectations.

Market participants are grappling with lingering economic uncertainties, including the potential impact of potential policy changes on inflation and economic growth. While some regional economic surveys point to continued expansion, others indicate a potential slowdown in economic activity.

The potential for new tariffs remains a significant wildcard, as some economists warn that such policies could introduce upside risks to inflation, complicating the Federal Reserve’s efforts to navigate the current economic landscape.

Technically, the US Dollar Index slipped below the 109.00 level, retreating from recent multi-year highs. However, the broader uptrend remains intact, with the 20-day Simple Moving Average providing support for the currency.