US Dollar Index rises to three-month highs after robust US CPI figures, trades near 104.80

The US Dollar Index (DXY), a measure of the US Dollar's strength against a basket of six major currencies, holds firm near three-month highs, trading around 104.80 during the Asian session on Wednesday. Concurrently, US yields are reaching multi-week highs across the yield curve.

There has been a significant shift in market sentiment, with expectations for an unchanged interest rate next month skyrocketing to 93%, marking a sharp contrast to just a month ago. Investors are now factoring in the possibility of a rate cut by the Federal Reserve (Fed) in June.

The unexpected upside surprise in US inflation for January has prompted analysts at Commerzbank to reassess the possibility of a pivot towards interest rate cuts by the Federal Reserve. There's speculation among observers about whether the previously planned Fed’s interest rate cut for May could now face uncertainty.

Regarding the outlook for May, it's prudent to wait for the data on Personal Consumption Expenditure (PCE) inflation for January and observe whether elevated price pressures persist into February before drawing conclusions about Fed policy adjustments.

The US headline Consumer Price Index (CPI) came in at 3.1% in January, surpassing the anticipated 2.9% but slightly lower than the previous rate of 3.4%. Month-over-month, US inflation rose by 0.3%, contrary to the expectation of maintaining the previous reading of 0.2%.

The US Core CPI (YoY) remained unchanged at 3.9%, defying market expectations of a decline to 3.7% in January. Additionally, US Core Inflation (MoM) increased by 0.4%, surpassing the expected unchanged reading of 0.3% for January.