USD vs CPI: Dollar dips after US inflation heat eases. Is the DXY bull trend over?

The dollar dipped on Thursday, while other assets like equities, currencies and commodities rocket after US consumer inflation data fell more than expected in October.

Headline annual inflation dipped to 7.7% in October, down from 8.2% in the previous month and below the 8% expected. The core measure of inflation that strips out volatile energy and food prices eased to 6.3% from 6.6%, again below expectations (6.5%). The monthly increase in headline inflation was 0.4% instead of the predicted 0.6%, while the monthly increase in core inflation was 0.3% instead of the expected 0.5%.

The CPI data miss fueled bearish market action on the dollar index (DXY), which fell to 108.6 at the time stamp, with EUR/USD surging 1.3% to 1.014, GBP/USD jumping 2.3% to 1.162, and gold pushing 1.8% higher to 1,735/oz. US equity indices skyrocketed with the S&P 500 (US 500) up 3.2% to 3,870 points and the tech-heavy Nasdaq 100 (US 100) up 4.3% to 11,280 points

Market reactions to the US October CPI print

Market reactions to the US October CPI data (DXY, EUR/USD, GBP/USD, Gold, S&P 500, Nasdaq 100)

Investors lower Fed hike expectations: USD and Treasury yields sink

The lower-than-expected US inflation rate has prompted investors to speculate on a slower pace of Federal Reserve interest rate hikes going forward.

The chances for the December meeting have shifted in favour of a 50 basis point raise, which is now factored in with an 80% probability, up from 50% before the CPI print.

The estimated terminal rate at which the Fed hiking cycle will conclude is now priced at 4.87% in May 2023, down from 5.07% before the inflation data. This means that markets are currently pricing in slightly more than 75 basis points of hike until May 2023.

U.S. Treasury yields, along with the value of the dollar, fell as a result of a massive reassessment in Fed interest rates by the market. The yield on the 10-year Treasury fell by 20bps on the day to 3.88%, the lower since early October.