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January US CPI: Unexpected Growth Signifies Continued Inflation Momentum
Pierre-Antoine Dusoulier, founder and CEO at iBanFirst, comments: “US CPI experienced unexpected growth in November and December last year, a development that is most likely due to a change in methodology as seasonal adjustment factors were recalculated.
“The uplift is significant and today’s figures show an further increase of 0.5% – a continuation of the recent inflation momentum. The increase defied all expectations showing that elevated inflation is more entrenched than once thought and this doesn’t solely apply to energy prices.”
“With the high possibility that the inflation issue will remain, it is likely that the terminal rate in the U.S. will reach much higher than 5%, with the market beginning to discuss a 6% rate. Some analysts even predict that the Fed will have to enforce the Taylor rule, hiking its benchmark interest rate above 8%.”
“It’s clear that the market is too complacent around the falling inflation narrative, and consequently, too confident that an interest rate cut could happen in the U.S. this year. FX-wise, the prevalent inflation problem might normally benefit the dollar as expectations of higher rates fuel the inflow of capital in the U.S., ultimately supporting the dollar exchange rate. However, the market still holds a bearish bias on the dollar for the time being.”
“As such, the number of short contracts continues to decrease each week. While it remains too early to tell, we may see a revival in the dollar index soon.”
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