US inflationary pressure will likely remain high for longer, requiring higher Fed interest rates.

The US dollar index (DXY) strengthened to the 104.40s range in Asian trading on Friday (17/Feb), while EUR/USD weakened further to its lowest level since January 9 at 1.0635. The greenback appreciation is related to a series of US economic data announcements that exceeded consensus estimates at yesterday's New York session.

dxy daily

DXY Daily chart via TradingView

The US producer price index (PPI) jumped 0.7 percent (Month-over-Month) in January 2023, even though consensus only predicted an increase of up to 0.4 percent. December data was also revised up from -0.4 percent to -0.2 percent.

The US jobless claims data illustrates a still resilient labor market situation. The number of claims increased by 194k for the week ended 11th February instead of the 200k previously estimated.

Combined with CPI data and retail sales that both beat expectations this week, the market can conclude that US inflationary pressures will likely remain at high levels for longer than previously estimated. Several analysts now no longer expect the Fed to cut interest rates again this year.

"Strong PPI data and hawkish communications from Cleveland Fed President Loretta Mester have raised rate expectations further, and this was key to the dollar's upside today," said John Velis, FX and macro strategist at BNY Mellon Markets New York.

During yesterday's Global Interdependence Center virtual conference, Loretta Mester said that "the upcoming data doesn't change my view that we need to take the Fed rate above 5 percent and hold it there for some time" in a bid to reach its 2 percent inflation target. Mester added, "I see compelling reasons for a 50 basis point hike (the Fed rate).