US CPI report, the highly anticipated December US CPI inflation did not deliver an upside surprise, with the core year-on-year figure coming in 0.1% below expectations.

This outcome sparked a risk-on reaction in the markets, leading to a significant recovery in equity indices. The S&P 500 index reclaimed the 6,000 level, while Bitcoin surged towards the $100k mark once again.
 

Impact on Fed Rate Cut Expectations

The absence of stronger price pressures prompted a repricing of expectations regarding Federal Reserve rate cuts. On Monday, the market was pricing in one rate cut by December 2025; however, the first 25 basis point cut is now anticipated for the July meeting, with a 50% chance of another cut before year-end. This adjustment appears more rational given the broader economic context, despite positive developments in the Middle East.

Fed doves quickly capitalized on the mixed data to reinforce their assertions that the disinflation process will persist into 2025. They also acknowledged the uncertainty surrounding the economic outlook, particularly with Donald Trump’s second presidency commencing in just five days. Recent commentary suggests that the new president might adopt a more measured trade strategy than previously expected.
 

Currency Market Reactions

In contrast to the performance of stocks, the US dollar rebounded from initial underperformance and reestablished its dominance in the foreign exchange market. This reaction could be interpreted in several ways: dollar bulls might doubt the Fed's commitment to a rate cut in 2025, thus disregarding the current repricing of rate cut expectations. Additionally, traders may prefer the safety and more optimistic outlook of the US economy compared to global counterparts.

This sentiment could also explain the rally in gold prices. Despite positive news from the Middle East and a stronger dollar, demand for gold remains robust, pushing prices above the $2,700 level.
 

Focus on Upcoming US Economic Data

Yesterday's market reactions underscored the significance of the US CPI report; however, it represents just a single data point. A series of weak economic releases will be necessary to firmly place substantial Fed rate cuts back on the agenda.

Today's attention shifts to US retail sales and weekly jobless claims. The market is eager for weaker data to bolster the current risk-positive sentiment, especially with Monday’s Trump Inauguration Day approaching. Consequently, there is a risk that positive data releases today, particularly an upside surprise in retail sales, could lead to a sharp decline in equities and further strengthen the dollar.
 

Japanese Yen's Resurgence

The Japanese yen is making a notable comeback this week, outperforming its main competitors. This trend is likely fueled by heightened expectations of a Bank of Japan (BoJ) rate hike next week. Positive remarks from Governor Ueda and solid economic data have paved the way for a potential 25 basis point increase, well ahead of the March Shunto wage negotiations. Importantly, markets are driven by expectations, and any disappointment next week could significantly impact yen traders.
 

Challenges Facing the British Pound

The British pound remains under pressure, trading at its lowest level against the dollar since October 2023. Mixed economic data continues to weigh on the currency, with weaker inflation figures followed by disappointing GDP and industrial production data. UK Chancellor Reeves has renewed commentary on these issues. Although UK yields may benefit from a decline in US Treasury yields, the country’s fiscal position remains a serious concern that the government will need to address in the near future.
 

Conclusion

The December US CPI report has set the stage for significant market movements and shifts in economic expectations. As traders look ahead, the focus will be on upcoming economic data releases and geopolitical developments that could influence both domestic and global markets.
 

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.