USD: Dollar jumps as consumer prices rise more than expected

NEW YORK: The US Dollar (USD) jumped on Wednesday after data showed that consumer prices rose more than economists expected in January, raising the likelihood that the Federal Reserve will hold interest rates higher for longer as it battles to bring down price pressures.

The headline consumer price index rose by 0.5% in January, while the core index rose by 0.4%. Both were expected to rise by 0.3%.

That puts headline consumer price gains at 3.0% for the year, above expectations for a 2.9% increase, while core prices rose at an annual pace of 3.3%, above expectations for a 3.1% rise.

“The takeaway is no matter what the reason was for the upside surprise, the Fed has been very clear that it won’t cut rates until inflation is close to 2%,” said Adam Button, chief currency analyst at ForexLive in Toronto.

“Whether it’s one-offs due to eggs or the fire in California, the prospect of hitting 2% inflation this year when we start the year with 0.5% is greatly diminished,” Button said.

The dollar index was last up 0.48% on the day at 108.45, while the euro fell 0.32% to $1.0327. Against the Japanese yen , the dollar strengthened 1.25% to 154.39 yen.

Interest rate futures traders are now pricing in 28 basis points of cuts by December, down from around 37 basis points before the data, implying only one 25-basis-point cut for the year.

Fed Chair Jerome Powell said on Tuesday that the U.S. central bank was in no rush to cut its short-term interest rate again, noting that the U.S. economy was “strong overall,” with low unemployment and inflation above the Fed’s 2% target.

He made the comments in testimony before the Senate Banking, Housing and Urban Affairs Committee. Powell will also testify before the House Financial Services Committee on Wednesday.

Meanwhile, traders are also focused on tariffs from the Donald Trump administration, which some analysts fear could add to price pressures if implemented.

Trump’s trade advisers were finalising plans on Wednesday for the reciprocal tariffs the U.S. president has vowed to impose on every country that charges duties on U.S. imports.

Separately, trade ministers of the 27-country European Union were due to meet later by video conference to determine their response after European Commission President Ursula von der Leyen said tariff moves against the bloc “will not go unanswered”.

Trump is also planning to raise tariffs on steel and aluminum imports to 25% effective on March 4.