The U.S. dollar jumped as the sticky CPI inflation lowered rate cut hopes

The U.S. dollar climbed to 5-month highs against major peers and the major stock indices plunged as the hotter-than-expected U.S. CPI inflation numbers pushed futures market traders to extend out expectations for the central bank’s first rate cut to September from June.

Fed funds futures trading data now suggests just a 17% likelihood that the Fed will lower rates by 25 basis points at its June meeting, according to the CME FedWatch Tool, while it increased to 46% for September.

With higher-than-expected inflation, a resilient economy, and a strong job market, it becomes more difficult for the Fed to advocate cutting rates any time soon.

The prospect of higher-for-longer U.S. interest rates presents more upside for the dollar and bodes poorly for high-risk, high-yield currencies.

The DXY-dollar index, which measures the greenback against six rivals, gained more than 1% on Wednesday to near a five-month peak of 105.30, pushing the Euro lower to $1.0720, the Sterling dropped to $1.2530, while the Japanese Yen hit a fresh 34-year low of ¥153.24 a dollar.

Furthermore, the hot consumer inflation report sent Treasury yields higher, with the 10-year Treasury yield, a benchmark for mortgage and other loans, soaring back above 4.55% following the inflation report, while the 2-year Treasury yield spiked to nearly 5%.

Sticky CPI inflation:

The key inflation index U.S. CPI -consumer price index- rose 3.5% year over year in March, above the Dow Jones estimate that called for 3.4%, and marking an acceleration for inflation led by higher shelter and energy costs.

The CPI in March rose 0.4% for the month and 3.5% year over year, versus estimates for a 0.3% monthly increase and 3.4% from 12 months earlier, according to economists polled by Dow Jones.

The Core CPI, which excludes volatile food and energy prices, accelerated 0.4% from the previous month while rising 3.8% from a year ago, compared to estimates for 0.3% and 3.7%, respectively, driven by higher services costs.

Market reaction:

The sticky inflation shook stock markets as well, with the three main indices ending down by 1%, while the small-cap Russell 2000 index settled with 2% losses, as it pushed off interest rate cuts by the Federal Reserve that investors have been anticipating.

The Dow Jones Industrial Average dropped 422.16 points, or 1.09%, to end at 38,461.51, the S&P 500 slid 0.95% to 5,160.64, while the rate-sensitive tech-heavy Nasdaq Composite tumbled 0.84% to close at 16,170.36, on worries higher-for-longer rates will start to choke the economy.

Market sentiment towards risk-driven sectors was further dampened during the trading session following the release of March’s Fed meeting minutes, which reflected officials’ concerns that inflation isn’t moving quickly enough toward the central bank’s 2% target.