Worrying US economic strength ahead of Retail Sales data today

This week’s US inflation report will have struck fear in the hearts of Federal Reserve officials. All of the key metrics on consumer price pressures surprised to the upside in January, including the main inflation measure, which unexpectedly rose to a seven-month high 3.0%.

If that wasn’t bad enough, we’re also seeing worrying signs of a bubbling in price pressures in the underlying index, which posted its largest monthly climb since April 2023, at least once accounting for two decimal places.

The big fear for policymakers is that there appears to be little reason to suggest that inflation will return to the 2% target anytime soon: wages are continuing to grow at a strong pace, consumer demand is robust and President Trump’s tariffs appear highly likely to push up imported prices.

The dollar initially rallied on Wednesday afternoon, as markets quickly pushed back their expected timing for the next Fed rate cut - at one stage, was not fully priced in until December (now October). Yet, this move upwards has proved to be short-lived, perhaps partly amid optimism over the possibility of a resolution in the Russia-Ukraine conflict.

We are somewhat baffled, however, by the speed and extent of the pullback in the greenback, as both the continued macroeconomic and interest rate divergence between the US and practically everywhere else would, under usual circumstances, normally be reflected in more sustained dollar strength.

This afternoon’s retail sales report (13:30 GMT) is up next, with economists eyeing a modest contraction in activity in January.