Dollar breaks key support, rates outlook seen unchanged by inflation data

By Tom Westbrook

SYDNEY (Reuters) – The dollar was below key support levels on Thursday, having hit new lows overnight, after data showing U.S. consumer prices rose at their fastest rate in nearly 40 years was not deemed worrying enough to change an already hawkish rates outlook.

After a couple of months in a tight range, the dollar dropped 0.6% on the euro overnight to $1.1453, its lowest since mid-November. There isn’t major chart resistance to further losses until $1.1525. It held at $1.1443 in Asia.

It also fell 0.6% on the yen, dropping through support around 115 to hit 114.38 yen per dollar, a more than two-week low. It last bought 114.63 yen early on Thursday.

Risk-sensitive currencies benefited. The Australian dollar rose more than 1%, its best percentage gain since October, and zoomed through its 50-day moving average to an almost two-month top of $0.7292. [AUD/]

Monthly U.S. inflation figures were a fraction higher than forecast and at 7%, the increase in year-on-year CPI was the biggest since June 1982.

But the Federal Reserve has already flagged higher rates this year and a shrinking balance sheet to curb it. Fed funds futures have already priced three hikes in 2022 and some dollar longs started bailing out since so much is already priced in.

“I don’t think it was anything within the components of the CPI that caused the market to take a sigh of relief,” said NatWest markets’ strategist Jan Nevruzi in a note.

“A few tenths of basis points of a difference on either side of consensus carries a much lower significance when CPI was running at 1/3 of current pace,” he added. “Would a 6.7% or 7.3% print really have changed the Fed’s trajectory in the next few months or this year – I do not think so.”

The New Zealand dollar jumped 0.9% and out of a two-month range after the U.S. inflation print and was testing its 50-day moving average at $0.6853 in the Asia session.

Sterling, which has been rallying as traders reckon Britain’s economy can survive a surge in COVID-19 cases and that the Bank of England is going to get started on rate hikes as soon as next month, is testing its 200-day moving average at $1.3708.

It is up 4% from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson who apologised for attending a party in the Downing Street garden during Britain’s first coronavirus lockdown.

The Canadian dollar has also rallied more than 3.5% in three weeks, gaining with oil prices as investors look past the potential economic fallout of the Omicron variant. The U.S. dollar index is hovering near a two-month low at 94.991.

Later on Thursday, Fed Governor Lael Brainard appears at Congress for a hearing into her nomination as deputy chair and in two weeks the Fed holds its first meeting of the year.

“The dollar does not have to increase because the Fed is readying a tightening cycle,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

“It is not a simple equation of Fed hikes equals dollar increases. The dollar is a counter-cyclical currency which decreases as the world economy recovers.”