The greenback rallied sharply across the board, soaring to 1.4412 against the euro and 2.0149 versus the sterling on the heels of strong consumer price inflation data - which further validated the Fed's decision to cut rates by 25-basis points instead of 50-bp, and further tempered expectations for aggressive easing down the road. The catalyst for the dollar's strongest one-day rally against the euro in over three-years was the November CPI report, revealing a jump higher in inflation.

The November CPI outpaced consensus estimates, climbing at its fastest pace in over two years and reinforcing the current policy dilemma haunting the Fed. With the FOMC stuck between a rock and a hard place, further aggressive easing is not likely given the persistent inflationary pressure. The headline CPI figure jumped to 4.3%, outpacing calls for an increase to 4.1% from 3.5% a year earlier. The monthly headline figure edged up by 0.8%, from 0.3% in October. The excluding food and energy readings were up 2.3% y/y versus 2.2% and 0.3% m/m from 0.2%. Also released today were industrial output, which reversed last month's 0.5% decline, rising by 0.3% and capacity utilization, which slipped to 81.5% from 81.7%.

Yen Plunges vs USD

The yen fell through the 113-level to its highest level in a month at 113.61 on a combination of strong US inflation data and a weaker than expected Q4 Tankan survey. The large manufacturer's diffusion index fell by more than forecast to 19.0, down from 23 from Q3. The large non-manufacturers diffusion index dropped to 16, versus 20.0 in the previous quarter.

USDJPY will face interim resistance at 113.60, backed by 114 and 114.50. Additional ceilings will emerge at 114.80, followed by 115 and 115.30. On the downside, support begins at 113, followed by 112.60 and 112.30. Subsequent floors will emerge at 112, followed by 111.50 and 111.

Euro Collapses

The euro suffered its largest single day decline against the dollar in three years, falling to 1.4412, its lowest level since early November. Eurozone inflation data was also higher than expected, with November inflation rising by 3.1% y/y and 0.5% m/m. The excluding food and energy figure edged up to 2.3% versus 2.1% a year earlier.