The recent US inflation data came out earlier today, encouraging the Federal Reserve to ease its monetary policy tightening pace further. The Consumer Price Index YoY dropped for the 6th consecutive month to 6.5%, its lowest since October 2021.
The core reading came in at 5.7% as widely expected. Meanwhile, the month-over-month reading showed a drop of 0.1% for the first time since the pandemic in May 2020, and the Core CPI MoM rose by 0.3% as expected.
The main driver behind the soft reading was the drop in energy prices where gasoline and fuel oil declined by 9.4% and 16.6%, respectively. On the other hand, food, apparel, and owners' equivalent rent rose by 0.3%, 0.5%, and 0.8%.
What Does This Reading Mean to Interest Rates?
Before the release, the market was pricing in two 25-basis point interest rate hikes in February and March meetings, with rates remaining on hold until November. After the figures came out, the market affirmed this track, with the probability of a 25 basis point hike in February rising to 94.3%.
How Will it Affect the US Dollar?
The dollar index, which measures the US dollar against a basket of other major currencies, fell sharply post the release to trade at 102.32, its lowest level since June 2022. However, the downside could be a bit limited, as the market was already expecting such soft readings on inflation, and the Fed's fund rate to peak at 5%.
We will be looking forward to more comments from Fed officials on the recent inflation data, and waiting for more economic data that could affirm or contradict the current market expectations.
Among these data could be the first reading of the 4th quarter GDP on the 26th of January, and the Fed's favorite inflation gauge, the Personal Consumption Expenditure index on the 27th of January, days ahead of the Federal Reserve policy meeting which starts on the 31st of January and ends on the 1st of February.