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High CPI inflation rate sends US dollar, yields higher

Examine February's CPI inflation rate effects on USD rise and higher yields, and its influence on Forex and bond markets. Understand the implications for future interest rates and potential forex strategies.
Source: Bloomberg
Picture of Frank Kaberna
Frank Kaberna
Director of Strategy, Chicago

Data current as of 3/12/2024

Key points

  • CPI inflation rate higher than expected: (0:48)
  • USD bounces back on high inflation: (2:32)
  • Will US dollar continue its rise?: (3:22)
  • Bonds move lower, yields higher: (5:32)
  • Are interest rate cuts delayed?: (6:37)

CPI inflation rate higher than expected

The Consumer Price Index (CPI) for February, registering a 0.1% hike above projections with a headline inflation of 3.2% and a core inflation of 3.8%. This development signals a potential shift in the economic landscape, affecting everything from purchasing power to investment strategies. When inflation rates surpass expectations, it nudges policymakers and traders alike to reassess their forecasts and positions, sparking conversations on the future direction of interest rates and economic health.

USD bounces back on high inflation

In the wake of the unexpected CPI report, the US dollar strengthened, appreciating against many of its major counterparts, including the Japanese yen (JPY) and the British pound (GBP). This rise emphasizes the dollar's status as a sanctuary in turbulent times, reinforced by rising inflation which often leads investors to reassess their risk allocations. For traders, tracking these movements is crucial, as they can influence forex strategies and portfolio balances directly.

Will US dollar continue its rise?

Speculation abounds on whether the US dollar can maintain its ascent. GBP/USD is a telling example, with its failure to maintain prices above the 1.3000 mark in the past year and its dip below 1.1000 in 2022 serving as stark reminders of the dollar's potent rally. Currency pairs like GBP/USD stand as barometers for the USD's relative strength and provide insight into international trade and economic sentiments, making them focal points for forex traders.

Bonds move lower, yields higher

Following the higher-than-expected inflation announcement, US Treasury bonds tumbled, pushing yields north of 4%. This inverse relationship between bond prices and yields showcases the market's anticipatory nature, reacting swiftly to inflationary pressures which might lead to a reevaluation of risk and return profiles by investors. For those engaged in the bond market, such shifts are crucial indicators of the broader economic momentum and central bank policy trajectories.

Are interest rate cuts delayed?

This development appeared to recalibrate expectations around 2024 interest rate cuts, with probabilities for adjustments in May and June plummeting to 17% and 67%, respectively. These projections from the CME's FedWatch tool provide insight into market sentiment ahead of the March FOMC meeting on the 20th, where Fed chair Powell will likely reveal his own projections for future months. For context, the Fed anticipated several interest rate cuts in 2024 at the December meeting three months ago.

How to trade US dollar

  1. Open an account to get started, or practice on a demo account
  2. Choose your forex trading platform
  3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

Reviewed by:
Glen Frybarger
Senior Content Strategist, Chicago

This information has been prepared by tastyfx, a trading name of tastyfx LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. tastyfx accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.