EUR/USD. Inflation in the US unexpectedly slowed down in April. What does today’s release say?
May 10, 2023 4:22 pm
The US inflation growth report published today turned out not to be on the side of the greenback: the dollar index sharply fell after yesterday’s surge. Major dollar pairs changed their configuration accordingly. The EUR/USD pair was no exception: bouncing off the local price minimum (1.0940), the price returned to the borders of the 10th figure.
Overall, dollar bulls have lost an important trump card. If April inflation had been in the “green zone,” the market would have again speculated that the regulator would decide on another interest rate hike in the coming months. But the April result ended such assumptions – at least in the context of the Federal Reserve’s summer meetings.
In the language of dry figures
Notably, almost all components of today’s report were at the forecast level. Thus, the overall consumer price index in monthly terms came out at 0.4% after March’s growth of 0.1%. The result matched the predictions of most experts. However, in annual terms, the overall CPI was in the “red zone”: with a forecast of 5.0%, the indicator came in at 4.9%. This is the weakest growth rate since April 2021.
The core consumer price index, excluding food and energy prices, matched forecasts. In monthly terms, a slight increase was recorded (0.4%), and a small decline (5.5%) in annual terms. This indicator unexpectedly rose to 5.6% in March.
The structure of today’s report indicates that energy prices in April fell by 5.1% (after a 6.4% decrease in March), while food prices rose by 7.7% after an increase of 8.5% a month earlier.
What the release says
First of all, to assess the significance of the published report, it is necessary to focus on the dynamics of the core consumer price index. The fact is that over the previous five months, the base index has consistently decreased (from 6.6% to 5.5%). Last month, the growth rate of the core CPI accelerated for the first time in the last six months. This fact strengthened the position of dollar bulls: the market started discussing the possibility that if the core index continues to gain momentum, the Federal Reserve will take responsive measures and raise the rate again – in June or July. The April non-farm payrolls, published last Friday, added fuel to the fire. It turned out that the inflation component of the report (the average hourly earnings indicator) unexpectedly showed confident growth: in monthly terms, the indicator grew by 0.5% (although the forecast was at 0.3%), and in annual terms – immediately by 4.4% (with a forecast of 4.2%).
Therefore, today’s result is significant in the context of strengthening/weakening hawkish expectations regarding the further actions of the Fed. After all, both the overall consumer price index (in annual terms) and the core index demonstrated a downward trend.
Following the May meeting of the Federal Reserve, it raised the interest rate by 25 basis points. Still, at the same time, it did not tighten its rhetoric in assessing the further prospects of monetary policy. The regulator indicated that from meeting to meeting, it would consider the cumulative volume of monetary policy tightening, the lagging effects of monetary policy, and the dynamics of key macro indicators – primarily in the inflation field.
Today’s inflation report has reduced the likelihood that the Fed will resume a hawkish course. According to the CME FedWatch Tool data, the probability of a rate hike at the June meeting is now 15% (the probability of maintaining the status quo, respectively, is 85%). The market is almost certain that the regulator will keep the rate at its current level next month. Notably, traders do not rule out a rate cut following the next – July – meeting. According to CME FedWatch Tool data, the probability of a 25-basis-point reduction in July (to 5.0%) is estimated at 36.2%. The chances of maintaining the status quo are 55.6%, and the probability of a 25-basis-point increase (to 5.5%) is 8.2%.
In other words, the inflation report has neutralized the hawkish sentiment of traders, at least in the context of the next two meetings.
Conclusions
US inflation has not become an ally of the greenback. The EUR/USD pair retreated from local lows and tested the borders of the 10th figure. However, traders could not impulsively overcome the resistance level of 1.1000 (the middle line of the Bollinger Bands indicator on the D1 timeframe).
Long positions should be considered after the pair’s bulls overcome this target. In this case, the next target of the upward movement will be the 1.1070 mark – this is the upper line of the Bollinger Bands indicator on the same timeframe. In addition, this price level represents the ceiling of the price range within which the pair has been trading for the third week in a row.
The material has been provided by InstaForex Company – www.instaforex.com
The US inflation growth report published today turned out not to be on the side of the greenback: the dollar index sharply fell after yesterday’s surge. Major dollar pairs changed their configuration accordingly. The EUR/USD pair was no exception: bouncing off the local price minimum (1.0940), the price returned to the borders of the 10th figure.
Overall, dollar bulls have lost an important trump card. If April inflation had been in the “green zone,” the market would have again speculated that the regulator would decide on another interest rate hike in the coming months. But the April result ended such assumptions – at least in the context of the Federal Reserve’s summer meetings.
In the language of dry figures
Notably, almost all components of today’s report were at the forecast level. Thus, the overall consumer price index in monthly terms came out at 0.4% after March’s growth of 0.1%. The result matched the predictions of most experts. However, in annual terms, the overall CPI was in the “red zone”: with a forecast of 5.0%, the indicator came in at 4.9%. This is the weakest growth rate since April 2021.
The core consumer price index, excluding food and energy prices, matched forecasts. In monthly terms, a slight increase was recorded (0.4%), and a small decline (5.5%) in annual terms. This indicator unexpectedly rose to 5.6% in March.
The structure of today’s report indicates that energy prices in April fell by 5.1% (after a 6.4% decrease in March), while food prices rose by 7.7% after an increase of 8.5% a month earlier.
What the release says
First of all, to assess the significance of the published report, it is necessary to focus on the dynamics of the core consumer price index. The fact is that over the previous five months, the base index has consistently decreased (from 6.6% to 5.5%). Last month, the growth rate of the core CPI accelerated for the first time in the last six months. This fact strengthened the position of dollar bulls: the market started discussing the possibility that if the core index continues to gain momentum, the Federal Reserve will take responsive measures and raise the rate again – in June or July. The April non-farm payrolls, published last Friday, added fuel to the fire. It turned out that the inflation component of the report (the average hourly earnings indicator) unexpectedly showed confident growth: in monthly terms, the indicator grew by 0.5% (although the forecast was at 0.3%), and in annual terms – immediately by 4.4% (with a forecast of 4.2%).
Therefore, today’s result is significant in the context of strengthening/weakening hawkish expectations regarding the further actions of the Fed. After all, both the overall consumer price index (in annual terms) and the core index demonstrated a downward trend.
Following the May meeting of the Federal Reserve, it raised the interest rate by 25 basis points. Still, at the same time, it did not tighten its rhetoric in assessing the further prospects of monetary policy. The regulator indicated that from meeting to meeting, it would consider the cumulative volume of monetary policy tightening, the lagging effects of monetary policy, and the dynamics of key macro indicators – primarily in the inflation field.
Today’s inflation report has reduced the likelihood that the Fed will resume a hawkish course. According to the CME FedWatch Tool data, the probability of a rate hike at the June meeting is now 15% (the probability of maintaining the status quo, respectively, is 85%). The market is almost certain that the regulator will keep the rate at its current level next month. Notably, traders do not rule out a rate cut following the next – July – meeting. According to CME FedWatch Tool data, the probability of a 25-basis-point reduction in July (to 5.0%) is estimated at 36.2%. The chances of maintaining the status quo are 55.6%, and the probability of a 25-basis-point increase (to 5.5%) is 8.2%.
In other words, the inflation report has neutralized the hawkish sentiment of traders, at least in the context of the next two meetings.
Conclusions
US inflation has not become an ally of the greenback. The EUR/USD pair retreated from local lows and tested the borders of the 10th figure. However, traders could not impulsively overcome the resistance level of 1.1000 (the middle line of the Bollinger Bands indicator on the D1 timeframe).
Long positions should be considered after the pair’s bulls overcome this target. In this case, the next target of the upward movement will be the 1.1070 mark – this is the upper line of the Bollinger Bands indicator on the same timeframe. In addition, this price level represents the ceiling of the price range within which the pair has been trading for the third week in a row.
The material has been provided by InstaForex Company – www.instaforex.com
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