Dollar Edges Lower After CPI Data; Fed Seen on Course

The dollar edged lower in early European trade Friday, as traders wagered that a hefty rise in U.S. consumer prices would not be enough to immediately jolt the Federal Reserve from its ultra easy monetary policy stance.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 89.990, marginally lower for the week.

USD/JPY rose 0.1% to 109.40, GBP/USD climbed 0.1% to 1.4179, while the risk-sensitive AUD/USD was marginally higher at 0.7753.

Data released on Thursday saw the U.S. consumer price index jumping 5.0% year-on-year in May, the sharpest rise in more than a dozen years, up 0.6% on the month, while core CPI, which excludes volatile food and energy prices, increased 3.8% year-on-year and 0.7% month-on-month in May.

The foreign exchange market had been wary of strong inflation numbers all week, and this exceeded expectations. However, the response has been muted as the CPI release included hefty contributions from short-term rises in airline ticket prices and used cars, all of which played into the Fed narrative of the surge in inflation being a temporary phenomena.

This belief in Fed thinking can clearly be seen in the bond market, as the yield on the benchmark 10-year U.S. Treasury note fell to a three-month low of 1.44%. When investors were worried about inflation in March, the yield had spiked to almost 1.78%.

Attention now turns to next week’s meeting of the FOMC, but there are no longer any great expectations of a shift in rhetoric over the need to taper stimulus.

Elsewhere, EUR/USD rose 0.2% to 1.2188, with ECB chief Christine Lagarde’s renewed pledge to deliver faster bond buying, despite improvements in the central bank’s growth forecasts, keeping gains by the single currency in check.

“The main takeaway from the ECB is that accommodation is here to stay and, like the Fed, it wants to be data rather than forecast driven,” said Kathy Lien, an analyst at BK Asset Management.

Later Friday sees the Russian central bank meet to decide on the appropriate level for interest rates in the country following an unexpectedly high inflation release earlier in the week.

Annual consumer inflation accelerated to 6.0% in May, according to data released Monday (NASDAQ:MNDY), way above the central bank’s target of 4%, and the highest since October 2016.

Interest rates were at 10% then, but are now at 5%, prompting most economists polled to expect a hike by 50 basis points, at 6:30 AM ET (1030 GMT), to 5.5%.

At 2:55 AM ET, USD/RUB traded 0.7% lower at 71.8027.