US recap: EUR/USD hits 6-month high as US CPI softens Fed outlook

Dec 13 (Reuters) – The dollar index fell 0.8% after another below-forecast US CPI report sent Treasury yields sharply lower and stocks higher initially, as the data affirm an expected slowing of Fed rate hikes beginning with a 50bp hike on Wednesday.

The index plunged below December’s base to a six-month low, as 2-year Treasury-bund yields spreads tumbled to their lowest since June, due to a 19bp dive in Treasury yields reflecting a lower fed funds terminal rate and 50bp of rates cuts in late 2023.

Dollar weakness was initially exacerbated by risk-on flows in response to tumbling Treasury yields, but the S&P 500 fell back after failing to clear December’s prior peak with Fed event risk Wednesday.

EUR/USD rose 0.7% after backing off Tuesday’s 1.0673 high on EBS. A close above the 38.2% Fibo of the 2021-22 slide at 1.0606 could see June’s 1.0774 high by the Fibo objective off 2022’s base reached, assuming Wednesday’s Fed statement, economic and fed funds predictions and press conference avoid hawkish surprises.

Gains should be backstopped by the ECB on Thursday hiking at least 50bp and with guidance that supports markets betting on more than 140bp of increases before a 2023 plateau.

USD/JPY tumbled 1.7%, bearing the full brunt of tumbling Treasury yields and flows out of the haven dollar. A break of December’s lows to deeper downside targets now awaits the Fed events and perhaps Thursday’s top-tier US data.

Sterling rose 0.77% after slipping from its earlier surge led by risk-on flows and a whopping 23bp rise in 2-year gilts-Treasury yield spreads.

The high at 1.2443 and an expected first close above 1.2300 since June suggest May’s highs will be in play if the BoE maintains its inflation fight on Thursday.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)