US inflation surpasses expectations, Fed likely to hold rates

Inflation in the United States rose more than anticipated at the start of the year, reducing the likelihood of multiple Federal Reserve rate cuts in 2025. At the same time, the Trump administration continues pushing forward with tariff policies that could further impact price pressures.

In January, the Consumer Price Index (CPI) posted its sharpest monthly increase since August 2023, driven by rising household expenses such as groceries, gasoline, and housing costs. Excluding food and energy, core CPI climbed 0.4%, surpassing expectations, fueled by higher car insurance rates, airfare costs, and a record spike in prescription drug prices.

January typically sees inflationary pressures, as many businesses adjust prices at the start of the year. This seasonal trend has become even more pronounced in the post-pandemic era, and some economists believe last month’s price surge may not be sustained.

However, the Bureau of Labor Statistics report on Wednesday suggests that inflationary progress may have stalled—or is at risk of reversing. With a strong labor market, the Federal Reserve is unlikely to ease monetary policy anytime soon. Fed officials are also monitoring Trump’s tariff plans, which have already begun to elevate consumer inflation expectations.

The release of the CPI report sent shockwaves through financial markets—the S&P 500 declined, while Treasury yields and the dollar surged. Interest rate swaps now indicate that traders expect only one rate cut this year, compared to two cuts expected before the inflation data was released.

Powell: Fed remains cautious on inflation

Speaking before the House Financial Services Committee, Federal Reserve Chair Jerome Powell acknowledged the progress made in reducing inflation but emphasized that further work is needed.

“We’re close, but not there yet,” Powell said in response to lawmakers’ questions on the second day of his semi-annual testimony before Congress.

Meanwhile, President Trump reiterated his calls for lower interest rates and later suggested that inflationary pressures were a result of his predecessor, Joe Biden’s policies.

UK economy avoids recession

The UK economy showed unexpected growth in the final quarter of 2024, providing some relief for the Labour government after a prolonged period of weak economic indicators.

According to the Office for National Statistics (ONS), gross domestic product (GDP) expanded by 0.1% in Q4, marking an improvement from the flat growth seen in the previous quarter. The figure exceeded economists’ expectations of a 0.1% contraction, which would have pushed the UK into a technical recession. Additionally, December’s GDP grew by 0.4%, outperforming forecasts.

While Downing Street may welcome the data, underlying indicators still point to ongoing economic weakness—with both private sector activity and per capita output shrinking for a second consecutive quarter.

For the full year, the UK economy expanded by just 0.9% in 2024. The Bank of England (BOE) remains cautious, recently halving its 2025 growth forecast to 0.7%, citing persistent economic challenges.

Oil surplus continues to shrink

The International Energy Agency (IEA) has once again reduced its forecast for a global oil surplus in 2025, as stronger demand in Asia and sanctions on OPEC+ nations tighten supply conditions.

The latest outlook estimates a daily surplus of 450,000 barrels, a 50% reduction in just two months. The agency also raised its global oil demand projection by nearly 100,000 barrels per day, bringing the total expected growth to 1.1 million barrels per day.

At the same time, the IEA cut its supply forecast for OPEC+ members, particularly Russia and Iran, following recent US-imposed sanctions on their energy exports.

“Concerns over new sanctions on Russia and Iran, along with fears of potential supply disruptions, contributed to last month’s oil price rally,” the Paris-based energy watchdog noted in its monthly market report.

DXY declined despite higher inflation

Despite the higher Consumer Price Index (CPI) report released yesterday, the US Dollar Index (DXY) failed to rally once again. This trend is not surprising, as the time/price method indicated that the dollar peaked back in January. Currently, the index is approaching a solid support level at 107.35, which should be monitored closely. A break below this support could lead to further declines, potentially down to 107.0.

EURUSD above 1.04

The EURUSD currency pair has advanced for the fifth consecutive trading day, including during today’s European session, reaching a high of 1.0440. This marks the highest level in about two weeks and confirms the bullish outlook suggested by the time/price method since the beginning of the year. Meanwhile, 1.0450 remains a significant resistance level. A break above this resistance could open the door for further gains towards 1.05.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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