US inflation rose 7.5% on a yearly basis in January from 7% in the previous month, surpassing the market expectation of 7.3%. CPI was up 0.6% on a monthly basis, also exceeding forecasts. Furthermore, the so-called core CPI climbed from 5.5% to 6% last month. Stronger-than-expected data triggered market moves, with the dollar surging across the market in a knee-jerk reaction.
Meanwhile, the benchmark United States 10-Year Treasury bond yield surged to fresh long-term highs, touching the 1.98% region for the first time since August 2019. As such, the yields keep approaching the 2% psychological level that could be reached in the coming weeks or even days.
After the report, the expectations for a 0.5% rate hike by the Federal Reserve in March have exceeded 53%. Before the release, expectations were around 30%. Also, market participants now bet on six rate hikes this year instead of four-to-five hikes. Rising odds of more aggressive policy tightening pushed US stocks lower, adding to demand for the safe-haven greenback.
Against this backdrop, EUR/USD reversed early gains to get back below the 1.1400 figure. The pair dropped to one-week lows around 1.1380 and could see more losses both in the short- and medium-term as the ECB maintains a cautious approach towards tightening.
Of note, in his latest remarks, the ECB chief economist Lane noted that inflation should return to the trend without a need for significant monetary policy changes, adding that there are no indications of aggregate overheating in the Eurozone labor market. As such, the path of least resistance for the common currency remains to the downside, with the immediate significant support arriving at 1.1330, where the 20-DMA lies.