It was supposed to be another benign inflation report according to economist estimates, potentially paving the way for the Federal Reserve to initiate rate cuts in the first half of the year.
Instead, the January figures have surprised investors to the upside, now pushing further ahead the start of policy easing in the United States.
United States Federal Reserve | Shutterstock.com
The dollar spiked immediately following the release of the inflation data, dragging down stocks and other risk-related assets.
In this article, we’ll delve into the key highlights of the inflation release, analyze the market reactions, and explore potential trade opportunities in the aftermath of this event.
US Inflation Report: Key Highlights
Market Reactions in 5 Charts
Trade idea of the week: Long USD/CHF
USD/CHF is on track to record its strongest one-day rally since March 2023, as inflation data releases in both the US and Switzerland diverged.
While inflation in the US came in hotter than expected, Switzerland reported easing price pressures, with consumer prices rising by only 1.3% year-over-year in January, well below market expectations of 1.7% and below the SNB’s upper target of 2% for the seventh consecutive month.
The diverging inflation dynamics between the two countries have led traders to anticipate contrasting monetary policy responses. While the Federal Reserve may now be less inclined to cut interest rates aggressively, the Swiss National Bank (SNB) could consider lowering its benchmark policy rate in response to subdued inflationary pressures.
Additionally, the Swiss National Bank (SNB) boosted its foreign exchange reserves for the second consecutive month in January. This action signals a recovery from the prolonged decline observed over the past two years, which had driven reserve levels to their lowest point in seven years, and should lead to franc weakness going forward.
As a result, the USD/CHF exchange rate is likely to experience upward pressure in the coming days and weeks. Technically, on Tuesday, USD/CHF surpassed the 200-day moving average, marking a significant shift from its previous three-month trend of trading below this indicator.
The recent pattern observed in the daily chart appears to resemble an inverted head and shoulders formation. This pattern suggests the potential for a continued bullish trend, with a target extension towards the November high of 0.9110.
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