January 14 (Reuters) – The dollar rallied on Friday, recouping some of the week’s previous losses, benefiting from a disconcerting reaction to weak retail sales as the Fed’s chorus of hawks intensified, pushing the set of the Treasury yield curve rising in favor of the US currency.

It was the second strange reaction to closely watched data this week after Wednesday’s report showed annual headline inflation hit a 39.5-year high coupled with a surprisingly high core CPI, which surprisingly did lower the dollar.

Friday’s rebound helped the dollar recoup most of the post-inflation plunge, as investors dismissed a December 3.1% plunge in retail sales in the control group as an anomaly in anticipated holiday spending for avoid shortages, biased seasonal adjustments and Omicron.

Supply issues continue to dampen output inflation, illustrated by an unexpected 0.3% drop in manufacturing output in December .

University of Michigan December consumer sentiment fell to its second lowest in a decade, with 1-year and 5-year inflation expectations up 0.1% and 0.3%, respectively, at 4, 9% and 3.1%.

EUR/USD fell 0.4%, likely helped by ECB President Christine Lagarde, reiterating that the drivers of inflation should subside and accommodation is still needed .

The post-CPI breakout above a seven-week trading band and past the daily cloud top may be a false breakout given Friday’s bearish engulfing candle and plunge deep into the cloud towards the top of the previous range of 1.1387.

The pound was down 0.26% after a second failed attempt in as many days to comfortably break above the 200-day moving average at 1.3737, with prices heavily overbought following rapid gains from December lows that followed the BoE rate hike .

Another rate hike is expected for the Feb. 3 meeting and a full percentage for 2022, keeping the pound in demand, as well as better-than-expected UK GDP data.

USD/JPY was down 0.04%, but far from the EBS low of 113.475 on Friday which drew buyers to the 76.4% and 38.2% Fibos at 113.44.

The 6-8 basis point rise in Treasury yields as Fed speakers stressed the need to fight inflation with tighter policy pushed the dollar higher, but was somewhat offset by the demand for the safe-haven yen amid continued equity market weakness.

The wide divergence between the fall in real Treasury and JGB yield spreads since the start of the pandemic seems unsustainable. Either USD/JPY must fall or real Treasury yields must rise sharply.

The Australian and Canadian dollars fell 1.1% and 0.3%, respectively, as metals fell and oil prices surged.

Bitcoin and Ether posted modest gains as the next major move in risk trading is expected.

Monday’s US holiday kicks off a slow week for US data.

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(Editing by Burton Frierson Randolph Donney is a Reuters market analyst. Opinions expressed are his own.)

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