- This morning’s economic calendar brought a key piece of data with the release of US inflation for the month of January. Inflation came-in at 2.1%, above the 1.9% expectation for the fifth consecutive month at or above the Fed’s target of 2%.

- The immediate response was a pop of USD-strength, and that brought pullbacks into major pairs like EUR/USD and AUD/USD. The S&P 500 has tilted-lower ahead of the US open.

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US Inflation Beats: 2.1% versus 1.9%

This morning brought a couple of key pieces of US data to the table, with the highlight being inflation data for the month of January. January inflation came-in at 2.1% versus the expectation of 1.9%, and core inflation printed at 1.8% versus the expectation of 1.7%. This continues the theme of stronger inflationary forces in the United States, and we now have the fifth consecutive month of annualized CPI growth at or above the Fed’s target of 2%.

US CPI Growth Since January, 2017

US CPI Growth Since January 2017

Chart prepared by James Stanley

Also coming out on the morning and perhaps even offsetting some of the Dollar-strength around this CPI print was US Advanced Retail Sales data for the month of January. This is often thought of as being an early look into US consumer behavior as this is one of the first data points released indicating retail performance in the prior month, and this came-in below expectations, printing at -.3% versus an expectation of .2% growth.

The net response thus far has been a leap of USD strength that was quickly met by sellers, much along the lines of what we were looking at yesterday in the event that inflation came-out above expectations.

US Dollar via ‘DXY’ One-Minute Chart: Rip and Dip on CPI Print

US Dollar One-Minute Chart

Chart prepared by James Stanley

Inflation Implications

The big concern here is one of impact, and whether or not this is something that adds additional pressure to what’s become a vulnerable backdrop across equity markets. The trigger for that vulnerability really appeared to show up as signs of stronger US inflation became more visible. In the Non-Farm Payrolls report earlier in the month, Average Hourly Earnings came-in at the strongest level since 2009. Matters haven’t really been the same since, as the following Monday saw stocks gap-down and the pressure remained for most of last week.

The premise here would be that stronger inflation brings a more-hawkish Fed; and the corresponding rise in Treasury Yields speaks to that. On the chart below, we’re looking at yields in 10-year Treasury notes, and we’re fast approaching the seven-year high at 3.04%. Perhaps the most disconcerting part of the below chart is the recent rate of change. After hovering around 2.4% for most of December, yields have posed a fast rise towards that 3% marker.

10-Year Treasury Note Yield Approaching Seven-Year High

10 Year Treasury Note Yield

Chart prepared by James Stanley

US Stocks

A late-session rally on Friday helped to bring the S&P higher off of the lows, and that held for most of the early portion of this week. The big question now is whether the selling will come back after we’ve gotten another clue that inflation in the US remains strong.

In the immediate aftermath of this morning’s print, US stock futures sold-off, breaking the calm that had started to show on Monday and Tuesday.

SPX500 CFD 30-Minute Chart: Break-Lower After Holding on to Friday Gains (in Blue)

SPX500 30-Minute Chart

Chart prepared by James Stanley

Forex: Does Dollar Strength Have Staying Power?

As we looked at in yesterday’s webinar, last week’s USD strength and, perhaps more to the point, the give-back in the early portion of the week have appeared to be unevenly distributed. As in, the Australian Dollar has been in a brisk fall against the US Dollar since latter-January, and that bearish theme stayed alive even as Dollar strength pulled back on Monday and Tuesday.

With this morning’s initial push by USD bulls, AUD/USD has folded down towards the 2018 low at .7756. If USD strength is a theme that might continue, a deeper move towards the .7500 level or, perhaps even the longer-term support around .7200 could remain an attractive theme to work with.

AUD/USD Daily Chart: Brisk Fall After January’s False Breakout

AUD/USD Daily Chart

Chart prepared by James Stanley

To Fade USD-Strength

On the flip side of that USD-strength scenario, we have the potential for the year-plus bearish trend in the Greenback to continue after this quick blip of strength. While many around the world are likely looking at EUR/USD for short-USD plays, perhaps a smoother trend has developed in USD/CHF. We looked at the pair earlier in the week as bearish price action returned, as indicated by a bearish break of a bear flag formation. This morning’s USD-strength has helped the pair to firm-up towards a prior area of support, showing the early signs of fresh resistance.

For those looking to fade this morning’s strength, USD/CHF is an attractive candidate for such a drive.

USD/CHF Hourly Chart: Test of Lower-High Resistance After This Morning’s USD-Strength

USD/CHF Hourly Chart

Chart prepared by James Stanley

EUR/USD- Can Go Both Ways

EUR/USD staged a fairly strong recovery in the early portion of this week, with the pair posing a fast move off of last week’s lows around 1.22 up to the 1.2400 level.

Earlier this week we looked at a series of levels that continue to garner attention, largely taken from prior price action. The lows around 1.2200 held, and resistance from earlier in the week is now showing some element of short-term support after this morning’s dip. This leaves intermediate-term charts in a weird space where, functionally, long or short positions can be justified as we could be seeing both a lower-high and a shorter-term higher-low.

The short thesis would be looking at stops above yesterday’s high, while the long scenario would be looking at stops below this week’s low.

EUR/USD Four-Hour Chart: Caught in the Middle

EUR/USD Four-Hour Chart

Chart prepared by James Stanley

To read more:

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--- Written by James Stanley, Strategist for DailyFX.com

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