Market Brief: Relief washes over markets as US inflation print meets expectations

Consumer price growth avoided a widely-feared acceleration in the United States last month, giving the Federal Reserve room to adopt a slightly more accommodative stance in the months to come. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—climbed 2.5 percent in the year ending in January, matching consensus estimates among economists polled by the major data providers ahead of the release, and was up 0.2 percent from December. On a headline all-items basis, prices rose 2.4 percent year-over-year—slower than the 2.5 percent expected in markets—and shelter costs showed signs of decelerating more sharply after playing a significant role in keeping inflation elevated since the pandemic.

Evidence of tariff-induced price pressures remained unclear, with core goods costs remaining restrained. Core goods prices excluding autos have risen just 1.6 percent over the last year—the fastest since 2023, but well below levels that had been feared—reflecting margin absorption among importing firms, inventory front-loading, supply chain rerouting, disinflation in major exporting countries, and the fact that the US remains a closed economy with low import penetration. Research published by the New York Fed yesterday found that prices of tariffed goods rose about 11 percent more than other goods in 2025, but with most consumer spending directed toward domestically-produced services, the aggregate impact on measured inflation has been relatively muted.

Treasury yields are coming down on the policy-sensitive front end of the curve, equity futures are surging, and the dollar is retreating against its major rivals as traders price in a slightly more aggressive monetary easing trajectory from the Fed in the second half of the year. Fed fund futures markets are putting near-coin toss odds on a third cut coming by December, and rate differentials are accordingly tilting against the dollar on foreign exchange markets.

More broadly, markets are showing signs of stabilisation after yesterday’s selloff, helped by reports of another potential reversal in the Trump administration’s tariff policies. According to the Financial Times, the president is considering expanding the number of exemptions applied to imported steel and aluminum products, reducing the damage inflicted on corporate margins and helping limit potential cost increases for consumers. The news is contributing to gains in the Canadian dollar and Mexican peso, but also reducing selling pressure on the dollar.

Equity markets have retreated from record highs as investors grow more sceptical about the durability of earnings growth among the largest artificial intelligence-linked firms and worry about the disruption spreading across the broader technology sector. A renewed rise in policy uncertainty—around trade, fiscal sustainability and regulation—has also lifted the discount rate applied to future profits, undermining the most crowded growth trades. US equities in particular are underperforming global peers largely because American leadership remains concentrated in richly valued megacap tech and is exposed to higher levels of political instability, while other regions benefit from cheaper valuations, clearer policy settings and diversification-driven flows.

Overwhelming momentum means this “Hedge America” dynamic could remain in play for many months yet, but we suspect that currency markets will eventually revert to “dollar smile” dynamics. Under the “smile” framework, the US dollar tends to strengthen when the American economy is outperforming, weaken during periods of steady global expansion and risk-taking, and strengthen again when global markets come under acute stress and investors seek safety. In other words, the dollar tends to benefit both from US exceptionalism on upswings, and from global liability matching flows on the downswings. To us, this means that even if US policy uncertainty remains elevated, the underlying mechanics of relative growth differentials, global dollar funding demand, and the depth of American financial markets mean the smile should largely persist, even if it becomes less symmetric over time.

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Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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