Dollar Index Stumbles as CPI Surprises and Global Markets React
Dollar Movement Predicted by Key Economic Indicators
The dollar index (DXY00) saw a minor drop of -0.01% on Wednesday. After reaching a one-week high, it closed largely unchanged influenced by a rally in EUR/USD. This shift came after news that President Trump and Russian President Putin agreed to start discussions aimed at ending the ongoing war in Ukraine.
Unexpected CPI Rise Raises Interest Rate Speculations
Initially, the dollar gained ground when the US January Consumer Price Index (CPI) unexpectedly surged to +3.0% year-on-year, a rise from 2.9% in December. This reading exceeded expectations, which anticipated no change at +2.9%, marking the fastest increase in seven months. Additionally, the core CPI, minus food and energy, also rose to +3.3% year-on-year from 3.2% in December, surpassing forecasts that predicted an easing to 3.1%.
Currently, the market anticipates only a 2% probability for a -25 basis point rate cut in the upcoming Federal Open Market Committee (FOMC) meeting on March 18-19.
Euro Gains on Diplomatic Developments
EUR/USD (^EURUSD) increased by +0.29% on Wednesday. The euro reversed earlier losses to gain momentum following the news of agreement between Trump and Putin. Furthermore, hawkish comments from European Central Bank (ECB) Governing Council member Holzmann regarding persistent inflation risks provided additional support.
Despite the euro’s rise, it experienced initial pressure from the stronger-than-expected US CPI report and a significant downturn in Italy’s industrial production, which dropped -3.1% month-on-month — much worse than the expected -0.2% and the largest decline in nearly three years.
Interest Rates and Economic Growth Insights from the ECB
Holzmann stated that cutting ECB interest rates by 50 basis points to stimulate the economy is not advisable, citing inflation pressures tied to tariffs. The market reflects a 97% expectation of a -25 basis point cut at the March 6 policy meeting.
Yen Faces Challenges Amid US Economic Data
The USD/JPY (^USDJPY) pair surged by +1.26%. The yen hit a one-week low against the dollar, affected by reduced expectations for a more accommodative Fed policy after the CPI report. Rising Treasury yields further pressured the yen. This decline was compounded by US tariffs of 25% imposed on steel and aluminum imports.
In Japan, January machine tool orders reported an increase of +4.7% year-on-year, representing the fourth consecutive monthly rise.
Mixed Signals for Precious Metals
April gold (GCJ25) settled down -3.90 (-0.13%), while March silver (SIH25) closed up +0.463 (+1.43%). Precious metals displayed mixed performance, influenced by the CPI report, which tempered expectations for future Fed interest rate cuts and likely contributed to bearish sentiment. The dollar index’s recent surge coupled with rising global bond yields added further pressure.
Despite these challenges, precious metals saw limited losses due to increased safe-haven demand fueled by falling stock prices. Silver received additional support from rising copper prices as a result of China’s stricter regulations on new copper smelters, which might restrict supply.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy
here.
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