What's next for the US dollar after CPI

<p>The data today was straightforward and hawkish for the US dollar today but the market reaction hasn't played out that way. The initial pop higher in the dollar and slump in equities has faded.</p><p>In particular, the fixed income market appears to be brushing aside worries. US 2-year yields are now below where they were before the data.</p><p>This kind of price action shows a strong conviction in a softening inflation environment. That was backed up by comments from Richmond Fed President Barkin today who said he's looking to be convinced that inflation is headed back to target and that he's open to lowering rates once inflation is on track to 2%.</p><p>The next few months should help that case with rents and housing inflation softness already baked in along with falling US car prices. The y/y numbers will also lap some high comps, bringing down those headlines to the low 3s.</p><p>Longer dated yields aren't quite as clear but US 10s are now down to 4.018% from a high of 4.068%.</p><p>Add it all up and the dollar is beginning to soften again, with cable leading the race as it climbs to 1.2745.</p><p>I spoke to Reuters immediately after the CPI release and touched on something I've been writing about for awhile now. The question isn't about March, April or June meetings, it's about the bigger picture.</p><blockquote data-test>"The
question everyone is struggling with is what kind of inflation regime
we are in – are we still in a 2010s era of low growth, low inflation and
we’re still just working through the end of the pandemic adjustment and
then we’re back into that?" Button said.</blockquote><blockquote data-test>"Obviously
that's what the market’s been betting on for the last two months. And I
think it's ultimately right, but getting there might not be as quick as
anyone would like,” he added.</blockquote><p>I didn't phrase that as elegantly as I would have liked but it really gets to the heart of it. If you believe that we're back in a low inflation regime then buying 10 years at 4.01% is a great bet, even if we back up to 4.20% in the short term. If you think there will be true sticky inflation then be careful.</p><p>This inflation report had some worrisome signs of core services inflation but are there signs of a pickup in inflation from here? I certainly don't see them. Couple that with an economy that will slow throughout the year and the destination is clear even if the timing isn't.</p><p>Though it's going to be a global phenomenon, it's bearish for the US dollar because it will compress spreads and because it should be positive for risk appetite throughout financial markets.</p>

This article was written by Adam Button at www.forexlive.com.