The Consumer Price Index (CPI) in the United States rose by 2.7% year-over-year in December, matching the rate from November, according to the US Bureau of Labor Statistics. Core CPI, which excludes food and energy, increased by 2.6% in December, slightly down from November’s 2.7%. On a monthly basis, the CPI grew by 0.3%, while core CPI rose by 0.2%. The shelter index saw a notable increase of 0.4%, contributing to the overall monthly rise. The food index went up by 0.7%, and the energy index had a smaller rise of 0.3%.

Market Reactions to CPI Data

After the CPI data was released, the US Dollar Index (DXY) dipped below 99.00, affected by lower US yields. In currency markets, the US Dollar was stronger against the Japanese Yen but weaker against the euro and pound. The Federal Reserve is keeping a close eye on inflation, which continues to exceed its 2% target. While prices have stabilized, core CPI is predicted to peak at 3% in Q2 2026 and then gradually decline. The December CPI report is not expected to significantly alter current monetary strategies. Typically, higher interest rates in the US lead to a stronger dollar, while Quantitative Easing can weaken it. The latest inflation report for December 2025 tells a similar story: prices are steady but aren’t dropping as quickly as some hoped. With the headline CPI at 2.7%, the market’s expectation for 50 basis points in rate cuts this year seems overly optimistic given the divided Federal Reserve. This gap between market expectations and central bank caution hints at possible significant price fluctuations in the upcoming weeks.

Economic Indicators and Market Strategies

We recommend preparing for increased volatility, especially around future economic data releases. Considering options on major indices or currency pairs could be a smart move, as a divided Fed means any surprise in jobs or inflation data could lead to big market reactions. For example, the CBOE Volatility Index (VIX) is currently around 14.5, which has been historically low before uncertain monetary policy changes. The US Dollar’s prompt drop below the crucial 99.00 mark on the DXY index suggests that the market is leaning towards the rate-cut perspective. As long as inflation doesn’t suddenly rise again, this gradual dollar weakening may continue, especially against currencies like the Euro. We should keep an eye on key technical levels; if EUR/USD breaks firmly above 1.1807, this trend is likely to continue and prompt further buying. Interest rate markets are already showing this dovish mindset, with US government bond yields dropping since the announcement. The CME FedWatch Tool indicates nearly 70% odds of a 25 basis point rate cut in the Federal Reserve’s March meeting, a significant increase from a few weeks ago. This makes long positions in Treasury note futures appealing, though they are crowded trades that could shift quickly if the Fed changes its tone. However, it’s crucial to pay close attention to specific details in the inflation report, especially shelter costs, which drove much of the monthly increase. We saw a similar situation in 2024, where persistent shelter inflation made the final stages of disinflation challenging. Since shelter accounts for over a third of the CPI basket, its ongoing strength could lead the Fed to postpone or reduce the number of planned rate cuts, quickly reversing current market trends. Create your live VT Markets account and start trading now.

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