"We may have seen a pause in the improvement that we have been hoping for" - Premier Miton Investors. 

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The Euro to Dollar exchange rate whip-sawed in a volatile response to official figures revealing accelerating price increases for some goods and services that have placed a question mark over how much longer a recently-declared disinflation process can be expected to continue for in the U.S. 

U.S. consumer price index inflation fell by less than was expected in January when the overall pace of price growth came in at 6.4%, down from 6.5% previously but above the 6.2% anticipated by consensus, while the core inflation rate ebbed by only 10 basis points to 5.6%.

The latter had been expected to fall to 5.5% but kept aloft by accelerating price growth for some goods and services including clothing and transportation services, which leaves the disinflation process recently acknowledged by some Federal Reserve (Fed) rate setters hanging by a thread. 

"Changes to the CPI calculation methodology will have had some impact on the published number, but it can’t hide the fact that the year-on-year figures are not looking good. Core inflation is higher than expected," says Neil Birrell, chief investment officer at Premier Miton Investors. 

"We may have seen a pause in the improvement that we have been hoping for. The outlook remains clouded by the uncertainty over inflation and resultant policy action. This might have all been priced in the short term, but it’s the longer term that should be the concern," Birrell adds.

Above: Euro to Dollar rate shown at 15-minute intervals. Click image for closer inspection. 

Tuesday's data comes after Fed Chairman Jerome Powell and others said with cautious optimism in February that earlier declines in inflation likely marked the beginning of a disinflation process that would eventually lead inflation back to the 2% target if followed up with the right policy actions. 

But Chairman Powell and numerous others on the Federal Open Market Committee had also reminded repeatedly in December and early January that prior instances of softening inflation had all been followed eventually by a fresh upturn while warning that the same could yet happen again.

"The disinflation in core goods prices ended in January, although the 0.1% increase in that group was still tame," says Katherine Judge, an economist at CIBC Capital Markets. 

"Core services rose by a strong 0.5%, with shelter being a main driver, and that resulted in the three-month annualized rate of change in core prices accelerating by three ticks to 4.6%," Judge writes following a review of the data. 

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Above: Consumer price index inflation by category. Source: Bureau of Labor Statistics. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

While it remains early days and the disinflation process could yet reassert itself, Tuesday's data leaves a lot resting on the February inflation report, which could have significant implications when it comes to the outlook for interest rates. 

Federal Funds rate futures adjusted on Tuesday to imply that borrowing costs are almost certain rise into the 5% to 5.25% range later this year.

That has so far been assumed as the likely peak for U.S. interest rates but the risk is that February's data reveals further negative developments in domestic price trends and leads Federal Open Market Committee members to raise forecasts for how high rates might ultimately need to rise in the months ahead. 

"Our view remains that inflation will continue to slow in coming months," says Knut Magnussen, a senior economist at DNB Markets. 

"However, the expected slowing for services may take somewhat longer as the labour market remains very tight. The January reading supports our view of two additional 25bp. hikes in March and May," he adds.

Above: Euro to Dollar rate shown at hourly intervals alongside 02-year and 10-year U.S. government bond yields. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)