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The US dollar was unsure which way to go initially after the December CPI but it’s now turned definitively lower.

EUR/USD is at the highs of the day, up 80 pips to 1.0833 from 1.0768 before the data. Adding to the momentum were comments from the Fed’s Harker, who said it was time to switch to 25 bps hikes. With that, the implied probability of a 50 bps hike on Feb 1 has fallen to 8% from 25% earlier this week.

Perhaps adding to the negative flows in the dollar is selling in USD/JPY. A report from Japan earlier said the BOJ will review the side effects of massive monetary easing at next week’s meeting. That’s likely a hint of less-dovish policy and USD/JPY is down 290 pips to 129.34 and near the lowest since May (support at 129.50).

I don’t rule out that there’s a bit of a scramble to buy Treasuries and sell JGBs on fears that the BOJ will deliver a big change next week. Those flows could be sending false signals to the broader market.

In any case, the idea of the Fed hiking further into a hard landing is dwindling with the market feeling much less worried about high inflation .

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