US PPI inflation was negative, so the market dumped the US dollar again. Speculation of a Fed rate cut is now increasing.

The US dollar had strengthened thanks to the release of CPI inflation data yesterday but fell again in New York session trading this Friday (12/January). This is because the US PPI inflation report was disappointing. The greenback mixed in major pairs, while the US Dollar Index (DXY) slipped to a daily low of 102.00s.

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The United States Producer Price Index (PPI) recorded -0.1% (month-over-month) in December 2023, whereas the previous consensus expected growth of +0.1%. PPI data for November 2023 was also revised from 0.0% to -0.1%.

PPI was even more disappointing on an annualized basis. Headline PPI registered 1.0% in actual terms versus 1.3% in the consensus estimate. Core PPI retreated to 1.8% versus the consensus estimate of 1.9%.

PPI is usually a leading indicator for CPI. The data signalled that the downward price trend will continue in the coming months despite the higher-than-expected December 2023 CPI inflation report. Consequently, traders are increasingly confident that the Federal Reserve will cut interest rates soon.

Fed Funds Futures currently show an 81% chance of a Fed rate cut scenario starting next March. The probability has increased from around 70% recorded after yesterday's CPI release.

"Even though you wouldn't say overall that the macroeconomic picture is screaming at you that they need to cut that fast, the market seems to be excited about the prospect of cuts," said Steve Englander, head of Global G10 FX research and North America macro strategy at Standard Chartered Bank's New York branch.

Expectations of another rate cut weighed on the greenback. AUD/USD and NZD/USD recovered the fastest, followed by the Japanese yen. However, EUR/USD and GBP/USD remained under pressure.

ECB President Christine Lagarde suddenly broached the subject of a rate cut in her interview today, sending the euro tumbling. Meanwhile, GBP/USD is concerned about the risk of a mild recession in the United Kingdom.