Dollar index outlook: How will high inflation figures impact the markets?

The US Dollar index is currently trading at 104.704 points at the beginning of Wednesday’s session, up by +0.55%.

This comes after the (DXY) index showed significant strength yesterday, attempting to maintain stability near its highest levels in three months.

Meanwhile, US bond yields reached their highest levels in several weeks at 4.328%, following unexpected inflation data.

There has been a significant shift in market sentiment, with expectations of no change in interest rates next month rising to 93%, a sharp contrast to just one month ago.

Markets are now pricing in the possibility of a rate cut starting in June. This comes after Consumer Price Index (CPI) figures came in higher than expected yesterday.

I believe the US Dollar will exhibit strong movements across all fronts. Especially as Consumer Price Index (CPI) numbers showed a significant increase in both monthly and annual core inflation indicators. The surprise was more pronounced in markets that strongly lean towards further inflation slowdown, with concerns only about a potential rate cut in March or June. However, even a rate cut in June seems highly doubtful under these circumstances.

NFIB data also reported a faster-than-expected decline for January, significantly impacting the markets and pushing overall sentiment toward risk aversion. Stocks fell, bond yields surged, and expectations for a current rate cut were diminished. From my perspective, the US Dollar may experience a significant rise against major currencies following these numbers. These data influenced market pricing amid higher-than-expected inflation rates and uncertainty regarding the Federal Reserve’s interest rate policies.

While the yield on 10-year Treasury bonds saw a substantial jump to 4.269%, the yield on 2-year Treasury bonds increased by more than 13 basis points to reach 4.601%. This movement confirms the inverse relationship between yields and prices, indicating market adjustments to unexpected inflation data.

Previously anticipating signs of inflation slowdown to support potential interest rate cuts, the market is now dominated by doubts about the possibility of multiple interest rate reductions this year, a strong strategy for stock market optimists. Some investors now expect the possibility of 10-year bond yields surpassing 5.00%, driven by ongoing inflation, a flexible job market, and strong economic growth.

Therefore, shortly, I expect the US Dollar to remain positive and reports on retail sales and expected Producer Price Index for January are likely to further strengthen this upward trend. Investors should be prepared for the ongoing rise in Treasury bond yields, reflecting a robust economic environment that could postpone interest rate cuts by the Federal Reserve.