U.S. Inflation Data Sparks Stock Rally, Yen Hits One-Month High

U.S. inflation report fuels expectations for rate cuts, lifting stocks and strengthening the yen.

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Stocks Surge Amid U.S. Inflation Data, Yen Hits High on BOJ Speculation

U.S. stocks saw significant gains as easing inflation data revived market optimism, with the possibility of future rate cuts from the Federal Reserve supporting investor sentiment. Meanwhile, the Japanese yen surged to its highest level in a month, driven by speculation that the Bank of Japan (BOJ) may raise interest rates soon.

U.S. Inflation Data Sparks Rate Cut Speculations

The relief rally in global stocks was spurred by the U.S. inflation report, which revealed that core inflation, excluding volatile food and energy prices, had risen by 3.2% in December, slightly below market expectations of 3.3%. This moderate inflation data has led traders to expect that the Federal Reserve could reduce interest rates in the coming months.

The news that U.S. consumer prices had increased at an annual rate of 2.9% last month also provided a boost to risk assets, suggesting that inflationary pressures may be cooling. As a result, market participants are now pricing in the possibility of two rate cuts by the end of the year, which weakened the U.S. dollar against most major currencies.

Dollar Weakens Amid Rate Cut Expectations

Following the inflation report, the dollar index, which measures the greenback against a basket of six major currencies, fell to 109.07. Analysts suggest that while the Fed may continue its policy of tightening in the short term, the outlook for rate cuts later in the year is becoming increasingly likely.

"Given the inflation data, it's clear that the expectations of aggressive rate hikes have been dialed back, and we may see rate cuts sooner than initially anticipated," said Kyle Chapman, an FX market analyst at Ballinger Group.

BOJ's Rate Hike Speculation Boosts Yen

The Japanese yen soared to 156.22 per U.S. dollar, its highest point in nearly a month, as traders adjusted their positions ahead of the Bank of Japan's upcoming meeting. BOJ Governor Kazuo Ueda's comments, suggesting that a rate hike could be on the horizon, have fueled expectations that Japan’s central bank may finally move to tighten monetary policy.

While Ueda has historically been cautious in making major policy changes, market participants are now assigning a more than 70% probability that the BOJ will raise rates in its upcoming meeting next week. “The yen’s recent strength reflects growing confidence that the BOJ may take a more hawkish stance than previously expected,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.

European Markets Show Mixed Sentiment

In Europe, stock futures pointed to a modest open following a strong performance in the previous trading session. The pan-European STOXX 600 index had its best day in four months on Wednesday, with investor focus now shifting toward earnings reports from major luxury goods companies and chipmakers, including Richemont and Taiwan Semiconductor Manufacturing Co.

Despite the positive earnings reports, investor sentiment in Europe remains cautious, especially with ongoing concerns about economic growth and potential geopolitical risks.

Oil Prices and Treasury Yields React to Inflation Data

In the energy markets, oil prices saw slight increases after the U.S. government reported a larger-than-expected decline in crude oil stockpiles. This development added to fears of potential supply disruptions, especially in light of new sanctions targeting Russian energy exports.

Meanwhile, U.S. Treasury yields dropped following the inflation report. The yield on benchmark 10-year U.S. Treasury notes fell by 13.5 basis points to 4.653%, further indicating that market expectations for future rate hikes have cooled.

Investor Focus on Global Developments

As the U.S. inflation data continues to shape market expectations, investors are also keeping a close watch on global developments, including tensions in the Middle East. With Israel ramping up strikes on Gaza, oil prices and other risk assets may face increased volatility in the coming days.

At the same time, market participants are preparing for President-elect Donald Trump's inauguration speech on January 20, as his policies, particularly on trade and tariffs, are expected to significantly impact both U.S. economic growth and global markets.