Investors who have been craving for some volatility this week had their wishes fulfilled following the December inflation report that showed prices rising at their fastest rate in almost 40 years!

The consumer prices index (CPI) jumped to 7% year-on-year, up from 6.8% in November while matching the median forecast from economists surveyed by Bloomberg. Core inflation, which strips out volatile items like food and energy rose 5.5%, well above the 4.9% reported in the previous month. This hot report should provide investors further evidence of persistent US inflation and reinforce speculation over the Federal Reserve raising interest rates sooner than expected.

However, the market reaction was interesting as traders shrugged off the data. US equities rose, the dollar tumbled against most currencies and Treasury yields pulled back slightly despite US inflation rising at its fastest pace since June 1982. While the positive reaction to the report could be based around the figures matching estimates, they will still fuel expectations over the Fed taking action in the face of rising inflation.

The mighty dollar was not so mighty on Wednesday afternoon with the Dollar Index (DXY) sinking towards the 95.00 level. A solid breakdown below this support may trigger a decline towards 94.56.

A weaker dollar propelled the EURUSD above the 1.1370 resistance level. This breakout could signal a move higher towards 1.1460 and 1.1530.

Looking at the USDJPY, prices tumbled lower with bears eyeing 114.50.

Earlier in the week, we asked whether gold was in trouble…well the precious metal looks to be in a good place with bulls hungry for $1831. If the dollar remains shaky for the rest of the week and Treasury yields continue to retreat, this could provide the precious metal a tailwind to push beyond $1831.

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