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US Inflation Rises to 7.0%

US inflation rises again this month to reach its highest level in 40 years, sending the US Dollar lower.

January 2022 US CPI Data Release

Today saw the release of monthly US CPI (inflation) data showing the extent to which the price of a representative basked of goods and services is rising. The data showed that month on month, US inflation rose by 0.5%, slightly higher than the 0.4% which was the consensus forecast. Core CPI, which measures the increase of a more narrowly defined basket of goods and services, rose by 0.6%, also slightly higher than the 0.5% which was the consensus forecast.

It is therefore clear that inflation rose by slightly more than expected. The monthly data shows yet another increase in the annualized rate of inflation to 7.0%, the highest rate recorded since 1982, and above last month’s annualized rate of 6.8%. However, it is also worth noting that the previous month saw a stronger monthly increase of 0.8%, which possibly points towards the pace of inflationary increase slowing down, although this is debatable.

Market Reaction to US CPI Data

The release was made near the start of Thursday’s New York session, so at the time of writing, markets have only had less than hours to react. However, it is clear that compared to the previous month’s CPI data release, reaction was stronger.

While the major US stock market index, the S&P 500, barely moved following the release, the US Dollar Index (USDX) declined by 0.31%. More importantly, it broke below a key support level and began to threaten a second lower support level.

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Probably the most interesting fact is that inflationary pressure, just like it did after last month’s CPI data release, produced a drop in the US Dollar and not an increase. This is probably due to two reasons: firstly, the data was not strong enough to make markets think it made an earlier rate hike by the Federal Reserve more likely; secondly, the overshoot was very small (only 0.1% in the month-on-month data).

What Does This Mean for Traders?

Traders should note that following yesterday’s remarks from the Chair of the Federal Reserve Jerome Powell, markets had begun to move more firmly in a risk-off direction and against the US Dollar. The CPI release has done nothing to reverse that general direction in the market and has continued the US Dollar’s mild but firm selloff. So, it seems that trades against the US Dollar and in favour of risky assets such as stocks, commodities, and riskier currencies will be the correct direction to be aiming for over the rest of this week. There are no scheduled economic data releases during this period that will be likely to change that.

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