Higher inflation from the US did not support the dollar. Bank of Japan close to a breakthrough?

Yesterday's US inflation data was definitely not good, but financial markets virtually ignored it. Very soon after the publication, the dollar index began to lose and Wall Street reached new historic highs, powered by artificial intelligence, the impact of which was visible in Oracle's quarterly results.

The Fed is moving away from the 'higher for longer' narrative

This reaction surprised many investors, as the reading was higher than expected for the second month in a row CPI was perceived as a potential short-term trigger for a correction in risky assets and an increase in profitability. This is even more so if we take into account the reasoning behind the higher reading in January due to one-off seasonal factors related to the opening of the new year. The market did not care about the data and is still aggressively betting on the Fed's slow departure from the 'higher for longer' narrative; he perceived higher inflation data as an inherent element of the prospect of a 'soft landing'. A higher reading could have calmed down some people worried about the economy, because if it were to decline rapidly, we would see lower-than-expected data.

Wall Street may see the periodically slightly higher than forecast (though still close to the Fed's target) inflation data as an inherent element of a narrative oriented towards a 'soft landing' and a strong economy, rather than an absolutely negative risk component, suggesting that the Fed will not hesitate to maintain feet unchanged. Recent comments from Fed members suggested that the bank will not be influenced by selective inflation readingsand the general situation in the economy and monetary policy. In this context, cuts around the middle of the year still seem certain, although they do not have to start in June. Yesterday's CPI data from the US indicated a 3,2% increase compared to 3,1% forecasts and 3,1% previously, with a 3,8% core inflation reading compared to 3,8% forecasts and 3,9% previously. Lower prices of used cars contributed to the lower report (down by 3,4% y/y), although prices of services excluding rent increased by 3,9% y/y.

Anti-dollar sentiment

The scale of the surprise itself is not significant enough for the market to start pricing in a completely different scenario based on the data than the one expected for many weeks. Risk-free rate expected to decline mid-year pushes global capital to allocate to risky sectors, such as stocks or cryptocurrencies. Bitcoin after a retest of $70,000 is rising above $73,000 again today, and Oracle shares gained almost 12% yesterday, after the company reported higher demand in the AI ​​cloud sector and announced closer business cooperation with Nvidia. Given the euphoria related to artificial intelligence and expectations suggesting rate cuts this year, it seems that the broader 'anti-dollar' macro sentiment would have to be spoiled by a much more serious surprise than the 0,1% surprise in the CPI reading.

The eyes of currency market speculators are today turned towards the Bank of Japan, where wage negotiations between trade unions and enterprises are expected to end today. Final information about them will appear on Friday, and the first information from the country indicates record increases that the government was supposed to push for, and which may encourage the Bank of Japan to make a historic change to its ultra-loose policy. Let us remember, however, that this is not the first moment of this type that could bring a major change in Japanese monetary policy, and the possible lack of any return in the BOJ's policy may significantly weaken the yen, withdraw the 'risky' bets of hawkish traders and potentially strengthen the Nikkei index, which is driven by an additional effect currency exporters.

UK GDP rose slightly by 0,2% month-on-month in February, in line with expectations, although it is down nearly 0,3% year-on-year. However, the dynamics of industrial production surprised negatively, with a surprisingly higher response from the construction sector, where over 1% growth was probably driven by one-off factors.

Today we pay 3,92 for the US dollar, 4,28 for the euro, 4,46 for the Swiss franc and 5,01 for the British pound sterling. It is possible that today, after mixed data from Great Britain, the GBP/PLN pair will test levels below 5.

Source: Eryk Szmyd, XTB