Choose country & language:

Dollar volatile as US CPI exceeds expectations

Home >  Daily Market Digest >  Dollar volatile as US CPI exceeds expectations

Written by:
Myrsini Giannouli

15 February 2023
Share the article

Important calendar events

  • JPY: Tertiary Industry Activity
  • GBP: Annual CPI and Core CPI, PPI Input and Output, RPI, HPI
  • EUR: Industrial Production, Trade Balance
  • USD: Retail Sales, Core Retail Sales, Empire State Manufacturing Index, Capacity Utilization Rate, Industrial Production, Business Inventories, NAHB Housing Market Index, TIC Long-Term Purchases


The dollar was volatile on Tuesday as US inflation data beat estimates, indicating that US inflationary pressures remain sticky. The dollar index dropped as low as 102.7, then swung upwards, reaching 103.4. US Treasury yields gained on renewed Fed rate hike expectations, with the US 10-year bond yielding over 3.75%. 

CPI data on Tuesday showed that price pressures in the US remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print. Core CPI, which excludes food and energy, was at 5.6% against predictions of a 5.5% print.

Cooling price pressures in the past few months gave the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. 

January’s CPI print illustrates the danger of inflation becoming entrenched, which may force the Fed to rethink its recent dovish pivot. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means there are likely still a couple of rate hikes up ahead, which may support the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.

Fedspeak over the past week has been hawkish, emphasizing that further rate rises should be expected and that interest rates will need to remain high for a long period. On Tuesday, Fed’s Williams emphasized that rates still have higher to go and they will have to be kept high for some time. Fed's Bowman stated on Monday that the UC central bank aims to continue raising interest rates to bring inflation down below 2%. 

Fed Chair Jerome Powell has stated that the disinflation process has begun but warned that it still has a long way to go. The Fed’s stance appears cautiously optimistic, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy. 

The US economy is expanding at a higher rate than anticipated, as US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease. 

Several important economic activity data are due on Wednesday for the US and may affect the currency. Primary among those are Retail Sales data, which may cause some volatility in dollar price in the wake of Tuesday’s inflation data.



The Euro was supported by upbeat economic data on Tuesday, indicating an improving EU economic outlook. EUR/USD however was mostly driven by the dollar’s movement and oscillated wildly on Tuesday, climbing to 1.080 and then dropping to 1.070. If the currency pair goes up, it may encounter resistance near 1.080. If the EUR/USD pair declines, it may find support at 1.065. 

Flash Employment Change data on Tuesday showed that Eurozone employment grew by 0.4% in Q4 of the previous year, beating forecasts of a 0.1% growth. Flash EU GDP data on Tuesday for the final quarter of 2022 fell in line with expectations. The eurozone economy expanded by 0.1%, against a growth of 0.3% in Q3 of 2022. 

On Monday, the European Commission released EU Economic Forecasts for the next two years. The EU economic outlook appears to be improving, with an upgraded growth forecast for 2023 and downgraded inflation expectations. The EC’s report was more optimistic than expected, concluding that the EU area would narrowly avoid entering a recession. The EC lifted their growth outlook for 2023 to 0.9%, indicating that economic recovery in the EU is starting and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023.

ECB rhetoric following the release of the report was also optimistic, with members Centeno and de Guindos highlighting the importance of declining EU inflation. ECB members also emphasized that rate hikes beyond March will be data-dependent. The conclusions of the EC report were ambiguous for the Euro. On the one hand, improving economic conditions support the Euro, but on the other, cooling price pressures may induce the ECB to pause rate hikes after March.

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise to combat inflation.

EU Industrial Production and Trade Balance are due on Wednesday and may cause some volatility in Euro price. 

EURUSD 1hr chart



The Sterling edged higher against the dollar on Tuesday, supported by robust UK labor data. GBP/USD was propelled to 1.227 after the release of the US CPI report, then retreated to 1.217. If the GBP/USD rate goes up, it may encounter resistance at 1.227, while support may be found near 1.196. 

British labor data on Tuesday showed that unemployment rates remain steady. Unemployment rates remained at 3.7%, in line with expectations.  Claimant Count Change in January dropped by 12.9K, against predictions of a raise of 17.9K. Unemployment rates remain low, but businesses cite economic pressures for not hiring more workers. Wages in the UK increased by 5.9% in October through December over the same month in the previous year, against estimates of a 6.4% rise. Wage growth in the UK remains slow, lagging behind inflation.

The BOE raised interest rates by another 50 bp at its February meeting, bringing the official bank rate to 4.0%. The BOE Monetary Policy Report issued after the meeting was more dovish than expected, pointing to a possible pause in rate hikes. 

Last week, BOE Monetary Policy Report Hearings indicated that BOE officials are divided over the central bank’s future monetary policy. The dichotomy between MPC members does not bode well for the British economic outlook, as there is a high risk that inflation will become entrenched. 

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

Inflation data have shown that inflation in the UK is cooling. UK headline inflation dropped to 10.5% in December from 10.7% in November. With inflation remaining firmly above 10% though, additional measures would be required to bring price pressures down.

British CPI inflation data on Wednesday are likely to cause volatility in the price of the Sterling. If CPI data shows that headline inflation in the UK is cooling, it can support the currency.

GBPUSD 1hr chart



The Yen retreated against the dollar on Tuesday, after the announcement of the Japanese Government’s nomination for the next BOJ Governor, and the USD/JPY climbed above the 132.9 level resistance. If the USD/JPY pair declines, it may find support near 129.8. If the pair climbs, it may find resistance at 134.8. 

Incumbent BOJ Governor Haruhiko Kuroda’s term in office expires in April. BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy. Kuroda’s successor may decide to unwind the BOJ’s ultra-easy policy and a pivot in Japan’s monetary policy within 2023, which would boost the Yen.

Japanese Prime Minister Fumio Kishida nominated former BOJ member Kazuo Ueda for the post of BOJ governor on Tuesday. Ueda is an academic economist and is also a firm supporter of the central bank’s ultra-loose monetary policy, warning repeatedly against prematurely unwinding Japan’s ultra-loose stance. A change in leadership with Ueda at the helm would probably make little difference in BOJ policy. Market reaction reflected this eventuality, and the Yen has been declining over the past few days.

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. 

Preliminary GDP data for Tuesday's final quarter of 2022 showed minimal economic expansion by 0.2%, falling short of expectations of 0.5% growth. The preliminary GDP Price Index on an annual basis printed 1.1% for 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print. In addition, wages in Japan increased for the first time in nine months by 4.8% year-on-year in December. Increased price pressures and wages raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

Tertiary Industry Activity data for Japan on Wednesday may affect the Yen, although USD/JPY is probably going to be driven primarily by the dollar’s movement this week.

USDJPY 1hr chart


The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

Share the article:

Latest news

Dollar tumbles as markets anticipate Fed pivot

Myrsini Giannouli 29 November 2023

Gold prices surge as US yields decline

Myrsini Giannouli 29 November 2023

Oil prices rally on anticipated supply cuts

Myrsini Giannouli 29 November 2023

Bitcoin rises above key $38,000 level

Myrsini Giannouli 29 November 2023
Why TopFX
13+ years

industry presence
as a Liquidity Provider

from 0.0 pips

and reliable execution


client funds


customer support