USD Continues to Rally After Inflation Nears Target

Talking Points

- Inflation nears the Fed’s goal.

- Bond yields jump, USD continues to rally.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

The Federal Reserve’s favored inflation measure, PCE, ticked up to 1.9% y/y in January, missing expectations of a 2.0% print, but up from December’s reading of 1.6%. While the figure is still just below the Fed’s target of 2%, the rise will add momentum to calls for a rate hike at the March FOMC meeting, with rate hike expectations already being priced in at 80% in the market.

Core US PCE - excluding energy and food prices - remained flat y/y in January at 1.7%, below expectations of a rise to 1.8%, while on a monthly basis, prices rose by 0.3%, in line with expectations and above December’s 0.1% reading.

In the fixed income market, the yield on the rate sensitive US two-year note, already boosted by hawkish Fed talk, touched a multi-year high of 1.305%, while the 10-yr US benchmark traded at a two-week yield high of 2.465%.

The boost in rate hike expectations and the higher short-end US yields have pushed the greenback sharply higher in European trading with EURUSD dropping to 1.5125, the lowest level seen since February 22, while GBPUSD traded below 1.2300 and is currently eyeing the recent range low of 1.2250 made on January 19.

Chart: EURUSD Four-Hour Timeframe (February 16 – March 1, 2017).

Chart by IG

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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