Lee Hardman, Currency Analyst at MUFG, suggests that the US dollar has derived some modest support from the release late last week of the stronger than expected US CPI report for January. Key Quotes “The report revealed that core inflation increased by 0.3% in January following an upwardly revised 0.2% increase in December. It was the biggest monthly increase for core inflation since May 2006 and helped lift the annual rate to 2.2%. The annual rate of core inflation has increased from 1.6% over the last year providing clear evidence that underlying inflation pressures are increasing which will provide reassurance to the Fed that inflation will return to their target once transitory factors such as lower oil prices and the stronger US dollar begin to fade. The headline inflation rate remained more subdued at 1.4% in January although has also accelerated in recent months from a flat reading in September of last year. The disinflationary impact from the stronger US dollar and lower oil prices are not proving sufficient to offset the building domestic inflation pressures which are evident in the services sector. The annual rate of inflation in the services sector excluding energy services is now running at 3.0% which is closer to rates which were evident prior to the global financial crisis. Still the market remains sceptical in the near-term that the Fed will resume monetary tightening given still tighter financial conditions which is limiting support for the US dollar for now. As a result market expectations for further limited Fed rate hikes do not appear consistent with the ongoing tightening in US labour market conditions and evidence of building domestic inflation pressures. It creates scope for the US dollar to strengthen if financial market conditions begin to ease.” For more information, read our latest forex news.