A stronger-than-expected US Consumer Price Index report sent the dollar index (DXY) surging to a multi-month high, rattling currency and commodities markets across the board.
US CPI rose 0.4% month-over-month and 3.5% year-over-year, exceeding economist forecasts of 0.3% and 3.4% respectively, signaling that inflation remains stubbornly elevated.
Core CPI, which strips out food and energy costs, also topped expectations, climbing 0.4% month-over-month and 3.8% year-over-year against forecasts of 0.3% and 3.7%.
The hotter inflation print immediately reshaped Federal Reserve rate cut expectations, with Fed swap markets now pricing in just 50 basis points of cuts for the year, down from 75 basis points the prior week.
Markets sharply reduced the probability of a rate cut at the next Federal Open Market Committee meeting, pricing in only a 3% chance of a 25 basis point reduction.
The odds for a cut at the subsequent FOMC meeting were also slim, with markets pricing in just a 21% probability, reflecting a significant shift in investor sentiment following the data release.
Treasury yields spiked sharply in response to the report, amplifying pressure on rate-sensitive assets and reinforcing the dollar’s broad advance across major currency pairs.
EUR/USD dropped to a one-week low as the dollar’s surge undercut the euro, with diminished expectations for Fed easing removing a key pillar of support for the shared currency.
The Japanese yen bore some of the heaviest losses, with USD/JPY rising sharply as the yen tumbled to a 33-year low against the dollar following the spike in Treasury note yields.
Gold prices initially fell under pressure as the dollar rallied and rate cut expectations were pared back, with higher global bond yields adding an additional bearish weight on precious metals.
June gold ultimately recovered from its early session losses and finished moderately higher, drawing support from a rise in the 10-year breakeven inflation expectations rate to a five-month high.
The uptick in breakeven inflation rates boosted demand for gold as an inflation hedge, helping the metal claw back ground even as the broader macro backdrop remained challenging for commodities.
The data reinforced growing market concerns that the Federal Reserve may be forced to maintain a restrictive policy stance for longer than previously anticipated, with inflation proving difficult to tame.
