Surprising increases in US producer and consumer prices last week have prompted a downward adjustment in market expectations for the Federal Reserve's potential interest rate cuts this year. Current futures pricing indicates a projection of approximately 90 basis points in cuts for 2024, down from the 160 bps forecasted at the end of the previous year. This shift has resulted in a rise in US yields, bolstering the US currency across various markets.

While goods prices continue to decrease, service inflation, even when excluding shelter costs, remains persistently resistant. This resilience supports the stance of Federal Reserve officials resisting an immediate rate cut. The stock market experienced a mild reaction, initially responding to the higher-than-expected inflation report with a setback but recovering as data revealed a slowdown in economic activity through weak retail sales.  It's important to note that January economic reports tend to be noisier due to the volatile impact of holidays, weather, and one-off events typical in the first month of the year.

Looking ahead, key events include the release of US consumer confidence, existing home sales, and flash PMIs this week. However, Wednesday is particularly crucial with the publication of the Fed's meeting minutes and the quarterly earnings report for Nvidia, a significant player in the market. Presently, the strength of the USD is not only due to its appeal but also reflects a lack of attractiveness in other assets. The ongoing trend is expected to persist until there is a shift in market sentiment or when the Fed decides to implement rate cuts, signalling a potential resumption of the USD downtrend.