Dollar resistant after inflation readings from the US

The box office session on the Old Continent opens today still 'on the wave' of yesterday's inflation data from the USA. The readings turned out to be slightly higher than forecasts (mainly the main CPI reading), which amounted to 3,4% compared to 3,2% of forecasts and 3,1% previously. Core inflation dropped from 4% to 3,9%, although the market expected a drop to 3,8%. But are the readings really clearly pro-dollar and will they 'turn the table'? Probably not, and to be sure about the further risk of the 'disinflationary' trend, the market would need to see a series of weaker (not isolated) data.

In confirmation we see today that the dollar index has already erased much of the upward move, and the S&P 500 index managed to almost completely erase yesterday's declines caused by macro readings. The market decided to perceive the data as 'noise'. Today at 14:30 p.m. the volatility of the dollar may increase again due to the PPI reading, in which investors will probably look for 'confirmation', a higher CPI reading.

Inflation with the base effect

At the moment, however, there are no very serious risks for inflation in the United States, primarily due to the decline in rent inflation, which will continue to decline for about half a year, among other things due to the base effect. A very important condition for a disinflationary trend is therefore met. Transport services and car prices surprised, but these are not necessarily indicators that will sustain higher readings in the coming months. So we have a single, higher reading, but the overall 'game' still looks pivotal, fuel prices remain stably lower.

Market attention is partly shifting to the Middle East, where there is still potential for escalation after the interception of the St. Nikolas increased tensions between Iran and the US. The Houthis refused to stop attacking the ships, as a result of which Great Britain and the USA launched attacks on the militants' targets at night, Polish time. Oil in the coming weeks will likely be closely watched by currency traders and a possible rally could mean higher volatility in the dollar market.

Cuts later in the year

The American dollar has erased a large part of yesterday's upward movement, and USD/PLN is still below PLN 4. Also, US 10-year Treasury bond yields did not see a significant rally after yesterday's data and still do stay around 4%. This suggests that the markets (and rightly so) do not believe that yesterday's reading will have a significant impact on the monetary policy expected this year in the United States. Although there was a surprise with inflation, it was relatively small. A single reading will not change the Fed's stance, and although the chances of a cut in March have decreased, it seems certain that cuts later in the year will take place given real interest rates above 2% in the US economy.

Moreover, comments from the Fed's Williams suggest that markets will be able to count on the end of the QT program, and yesterday's statement by Mester confirmed that the Federal Reserve will start discussions on this issue this year. In turn, Austan Goolsbee, president of the Chicago Fed, suggested that CPI may have less impact on achieving the Fed's target and yesterday's slightly higher readings do not pull the Fed off track. We currently pay PLN 3,97010 for the US dollar, PLN 4,3454 for the euro, PLN 4,6551 for the Swiss franc and PLN 5,0620 for the pound sterling.

Source: Eryk Szmyd, XTB