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The market is prepared for a firmer US CPI print today. Economists polled by Bloomberg expect April’s CPI inflation to hold at 0.4% MoM for a third month. PPI inflation increased by 0.5% MoM in April; consensus had expected a smaller rise of 0.3% vs. -0.1% in March. In YoY terms, CPI increased to a six-month high of 3.5% in April from 3.2% in March, while PPI rose to 2.2% from 1.8%. Additionally, 1-year inflation expectations increased to 3.3% in April after holding steady at 3% in the first three months of 2024, according to the New York Fed. The one by the University of Michigan also increased to 3.2% in April from 2.9-3.0% in January-March and rose again to 3.5% in May.
The recent higher US inflation readings have led Fed officials to suggest a possible reduction in the three interest rate cuts projected for 2024 in March’s Summary of Economic Projections. However, the Fed is not looking to resume rate hikes, a narrative that Fed Chair Jerome Powell started at the FOMC meeting on May 1. Cleveland Fed President Loretta Mester said it was too early to conclude that inflation had reversed its falling trend. At an event in Amsterdam hours earlier, Powell expressed confidence that inflation would decline again on a monthly basis. He noted that monetary policy was restrictive and working, just taking longer than expected, to weigh on spending by tightening credit amid signs of cooling demand for workers. Hence, today’s US retail sales report may be important apart from CPI. Consensus sees advance retail sales slowing a second month to 0.4% MoM in April vs. 0.7% in March and 1% in February.
The DXY Index has been keeping to 105-105.8 range following its fall from 106.5 to 104.5 after the FOMC meeting on May 1. Last Thursday’s attempt to break above its 20-day moving average (105.75) was thwarted by an unexpected surge in US initial jobless claims. Overnight, the DXY briefly rose to 105.5 on the higher PPI inflation but Powell’s interpretation of the data as mixed led it to close the session at 105. Breaking this psychological support level would require the EUR to strengthen, as it is the DXY’s most significant component.
EUR/USD appreciated by 0.3% to 1.0820, closing above its 50- and 200-day moving averages. Despite expectations for the European Central Bank to lower interest rates in June, the euro has recovered from its 1.06 low in mid-April. Eurostat reported that the Eurozone economy exited its technical recession in 2H23. Today’s GDP growth should keep to the 0.3% QoQ sa level of the advanced estimate reported on April 30. The EU Commission’s economic forecasts for 2024 should depict a more optimistic recovery from the technical recession in 2H23. Hence, markets should be mindful that the ECB did not pre-commit to more rate cuts beyond June, with future decisions largely dependent on data. Nonetheless, EUR/USD must push above the 1.0820-1.0835, the resistance zone marked by its 100- and 300-day MAs, to extend its appreciation. In conclusion, the market is on the edge, deciding between supporting the DXY on the US rates staying high for longer, or favouring the EUR on better growth prospects.
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Related Insights
- CNY rates: New monetary policy tool 30 Oct 2024
- India rates: Near-term inflation to prove sticky 30 Oct 2024
- USD Rates: Hitting the pain threshold 30 Oct 2024
Related Insights
- CNY rates: New monetary policy tool 30 Oct 2024
- India rates: Near-term inflation to prove sticky 30 Oct 2024
- USD Rates: Hitting the pain threshold 30 Oct 2024
