U.S. CPI Readings Dominate Currency Market Movements

(RTTNews) - Dull jobs data from the U.S. that diminished lingering fears of a hawkish Fed and triggered the Dollar's retreat set the context for currency markets in the past week spanning January 9 to 13. Less-than-expected growth in wages as well as a multi-month low in non-farm payrolls added, instilled a sense of relief that the Fed would not have sufficient headroom to continue to be aggressive on its monetary policy tightening.

As the week progressed, expectations of a decisive drop in inflation that the Fed could comfortably take cognizance of, got further reinforced. Tuesday's speech by Fed Chair Jerome Powell that made no mention of the Fed's likely moves on interest rates also supported the relief rally in risk assets.

On Thursday, as expected, the headline CPI for December cooled to 6.5 percent from 7.1 percent in November while core inflation declined to 5.7 percent, from 6 percent in the previous month. CPI has been declining steadily from 9.1 percent in June 2022 to 7.7 percent by October and 7.1 percent by November.

The Dollar Index (DXY), which had plunged to as much as 102.94 on Monday amidst the weak sentiment following the dull jobs data, traded above 103 on Tuesday as well as Wednesday. However, the steady decline in inflation expedited the Dollar's weakness causing the Dollar Index to drop to a low of 102.08 on Thursday and to the weekly low of 101.99 on Friday.

During the week January 9-13, the DXY depreciated from 103.91 to 102.20. The Dollar's bearish tilt provided a bullish prod to major currencies like the Euro, Pound, Yen etc.

The Euro strengthened against the Dollar over the course of the past week. The EUR/USD pair increased from 1.0637 at the beginning of the week to 1.0828 at the end of the week. The pair touched a low of 1.0536 on Monday and a high of 1.0869 on Friday. Besides the U.S. CPI, the war in Ukraine, the energy crisis and a hawkish ECB also influenced the pair's movements in the past week.

The GBP/USD pair also strengthened in the past week, from 1.2094 at the beginning of the week to 1.2226 by the close of the week. The pair touched the weekly low of 1.2087 on Monday as well as Thursday. The surprise uptick in U.K.'s GDP in the month of November as well as the Dollar's weakness post the drop in U.S. CPI caused the pound to touch the weekly high of $1.2250 on Friday.

The USD/JPY pair which closed at 132.07 on January 6 dropped to 127.88 by January 13. USD/JPY touched a high of 132.88 on Wednesday and a low of 127.46 on Friday. The yen's strength against the Dollar and its rise to a seven-month high came ahead of the meeting of Bank of Japan and speculations that rising inflation in the country could goad the BoJ to adopt a more hawkish stance.

While the Dollar Index remains subdued at 102.13, post the softening in the inflation, all eyes are on Bank of Japan and its likely stance on inflation control and interest rates. The yen has indeed benefitted from speculations of a hawkish pivot by the BoJ after last month's tweaking of the yield curve control policy. The USD/JPY pair is currently at 128.60, ahead of the BoJ decision to be known later on Tuesday. The EUR/USD pair currently at 1.0846 and the GBP/USD pair currently at 1.2257, would also be swayed by hawkish monetary policy leanings at home as well as elsewhere.