What does Thursday’s US inflation data tell us? Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, analyzes why USD exchange rates did not make huge jumps after the data was released.

Where is the USD euphoria?

US consumer prices rose 0.3% in December from November on a seasonally adjusted basis. The median estimate of analysts was for a 0.2% increase. The core rate was 0.3% vs. November, in line with the median estimate. This was not a massive shock, but a small deviation from the analyst consensus, hardly significant.

Shouldn’t we have expected more USD euphoria? After all, this result calls into question the image of a Fed that (a) will soon have room to cut rates and (b) will use it boldly. Well, with his recent very dovish comments at the December FOMC press conference, Fed Chairman Jay Powell may have given some observers the impression that he is not the tough inflation fighter (a sort of Paul Volcker 2.0) that he liked to portray himself as not so long ago.

However, this possible new image of the Fed changes the elasticity of USD exchange rates to inflation news. The less the US monetary authorities appear to be active inflation fighters, the less USD-positive high inflation data will appear.

In fact, if monetary policy is perceived to be too dovish, surprisingly high inflation can actually hurt the Dollar. We are nowhere near that point. But Thursday’s reaction in the currency market already points to a bit of an image problem that the Fed is facing right now. This is something to keep an eye on in the near future!