The U.S. dollar reached a one-week high against the Japanese yen following the release of January’s consumer price index (CPI) data, which exceeded economist expectations. The report indicated a significant increase in consumer prices, bolstering the likelihood of sustained higher interest rates from the Federal Reserve as it strives to curb inflation.
The January CPI revealed a 0.5% increase, the highest in nearly 18 months, reflecting rising costs for various goods and services. Core CPI, excluding volatile food and energy prices, also saw a 0.4% rise. Both figures surpassed the anticipated 0.3% increase.
Annually, headline CPI reached 3.0%, exceeding the projected 2.9%, while core CPI grew by 3.3%, surpassing the 3.1% forecast. This persistent inflationary pressure underscores the Federal Reserve’s commitment to maintaining higher interest rates until inflation nears its 2% target. As Adam Button, chief currency analyst at ForexLive in Toronto, noted, the likelihood of achieving the 2% inflation target this year has diminished significantly given the 0.5% starting point in January. Regardless of the underlying causes for the unexpected price increases, the Federal Reserve remains steadfast in its commitment to controlling inflation.
Reflecting this sentiment, interest rate futures traders have adjusted their expectations, now pricing in approximately 27 basis points of cuts by December, down from around 37 basis points pre-CPI data. This suggests a higher probability of only a single 25-basis-point rate cut this year.
The dollar’s response was immediate, surging 1.29% to 154.44 Japanese yen. The yen’s sensitivity to the U.S.-Japan interest rate differential explains this pronounced movement. The dollar index also saw an increase, reaching a one-week high of 108.52 before settling at 107.95, up 0.02% on the day.
However, the dollar’s gains were partially offset as traders secured profits and assessed whether the January inflation report represents a temporary anomaly or a sustained trend of rising prices. Some analysts, like Thomas Simons, chief U.S. economist at Jefferies, cautioned against overinterpreting the January figures, citing the month’s tendency for significant annual price adjustments.
Federal Reserve Chair Jerome Powell reiterated the central bank’s commitment to a gradual approach to interest rate adjustments during his congressional testimony. While acknowledging “great progress” on inflation, he emphasized the need for continued vigilance.
In other currency news, the euro strengthened following comments by Bundesbank President Joachim Nagel advocating for a gradual easing of monetary policy by the European Central Bank, moving away from targeting a less defined “neutral” interest rate level. The euro rose 0.27% to $1.0388.
Meanwhile, potential trade tariffs imposed by the previous administration remain a concern, as some analysts believe they could exacerbate inflationary pressures. While there are indications of potential moderation in housing costs later in 2025, the impact of tariffs on overall inflation remains uncertain.
Finally, the cryptocurrency market witnessed a modest increase, with Bitcoin gaining 0.80% to $97,162.44.
