Will inflation data continue to propel USD upwards?

US inflation (CPI) once again surprised on the upside in April. Core CPI rose 6.2 per cent year-on-year, higher than the expected 6.0 per cent. The numbers fuel concerns that the Federal Reserve is behind the curve, and there is still some probability of a 75 bp hike in July implied by market prices, despite chairman Powell’s soothing comments last week. There is some silver lining, however, since inflation fell from the March numbers, even if a lower inflation rate was widely expected.

Consequently, the dollar-index is in a strong trend and challenges multi-year highs. In the short term, the dollar strength puts pressure on both risk assets as well as commodities. The question is if the dollar will continue to rise or is over-bought and will top out at current levels.

On balance, we believe the odds seem to favour the dollar for now. EUR/USD has been consolidating during the last two weeks. Perhaps there is more downside to be realised for the currency pair.

EUR/USD, May 10, 2021, to May 11, 2022

In the weekly chart below, one can see how EUR/USD is trading at support. A break and lows around 1.035, last seen in 2016 may be next.

EUR/USD, October 14 2014 to May 11 2022

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence