US Dollar Bounces Back Despite Drop In Inflation - Options Expiry In Play

The US Dollar (via the DXY Index) has rallied sharply around the start of the US cash equity open, turning from negative to positive just as stock trading got underway in New York. But following the December US Consumer Price Index that showed the weakest headline pace since August 2017 – and at +1.9% y/y, below the Fed’s medium-term target of +2% - some traders are left scratching their heads as to the catalyst.

MANY FACTORS, NO CLEAR CATALYST

A look around the markets and news wire yields no clear catalyst for the move; there are many cross-currents at present time. Signs that the US-China trade war negotiations may be moving in the right direction aren’t filtering through across markets, even has USD/CNH has fallen for the third consecutive day; global equities and bond yields are both lower on the day. Elsewhere, there are few signs that the US government shutdown will end anytime soon.

Geopolitics may be closer to the source of consternation this morning, with news reports detailing troop movement along the Turkish-Syria border, coming on the back of the news that the US military has started winding down its operations in the Syrian theater. That an American ally in NATO (Turkey) would attack a US-backed military operation (run by the Kurds) may be causing some unease among traders given the potential ramifications for the conflict growing into a more direct showdown with Iran and Russia.

However, none of these explanations perfectly fit the way markets have responded this morning. Evidence that inflation is falling below the Fed’s medium-term target should provoke a drop in US Treasury yields and the US Dollar; they’re not. A weaker USD/CNH should be spurring more risk appetite, particularly between the Australian and New Zealand Dollars; it’s not. Signs of spreading conflict in the Middle East involving actors critical to global oil trade should be a catalyst for higher prices; they’re not.

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