US recap: US inflation surprise resuscitates dollar dominance

Sept 13 (Reuters) – The dollar index soared on Tuesday, coming back from initial losses after a highly anticipated US CPI report showed more inflation than markets expected.

Core CPI rose to 6.3% year-on-year, above the Reuters consensus forecast of 6.1% and headline inflation slipped to 8.3%, versus expectations for 8.1%, lifting the dollar index from losses of 0.4% prior to the data to gains of 1.37% before the US close.

Traders had been reducing long dollar positions ahead of the report, expecting that the recent slide in oil would tamp down inflation.

Instead, shorts scrambled to cover positions after the report ratcheted Fed rate expectations higher, with futures markets now pricing in a terminal fed funds rate around 4.34% by April 2023.

EUR/USD opened NorAm at 1.1079 and fell nearly two big figures after the CPI print as markets bet with increasing conviction that the Fed could deliver an exceptionally aggressive 100bp hike on Sept. 21 meeting, overshadowing recent hawkish ECB rate expectations.

USD JPY gained 2% from its pre-CPI low of 141.61, trading at 144.45 in late-US dealings. With the BoJ sticking to its accommodative monetary policy, diverging rates are having a deleterious affect on the yen.

Though Japanese officials have warned about the pace of currency weakness, yen buyers are likely to be overrun as traders take out 2022 highs by 145 on the way to more significant big-figure resistance by 150, if US data continue to point to a more hawkish Fed rate path.

GBP/USD has its own date with inflation data on Wednesday. UK CPI is expected to have risen to 10.2% from 10.1% the previous month.

Sterling bulls had lifted the pound, hoping a rise in UK inflation coupled with falling US price growth might boost GBP/USD further.

Instead, cable cratered following the US report, giving sterling bears the impetus to test 2022 lows by 1.1407. A larger-than-expected rise in UK inflation may weigh further on the pound given the BoE’s reluctance so far to match supersized Fed hikes for fear of deepening UK recession risks.

Risk markets fell hard, with equities plummeting around 3%. The higher Fed rate path saw the US 2s-10s inversion move to -32bps.

Gold fell 1.17% to 1,704, with higher rates a weight on the return-less asset. Cryptos also came under intense pressure as risk was broadly retreated.

Bitcoin fell 7.4% to USD 20.7k, ETH dropped 6.1% to USD 1,615.

(Editing by Burton Frierson; Paul Spirgel and Christopher Romano are Reuters market analysts. The views expressed are their own.)