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US inflation at highest level in 6 years but USD lower on the day

Summary:

  • US CPI Y/Y: 2.8% vs 2.5% prior
  • Core reading Y/Y: 2.2% vs 2.1% prior
  • USD remains lower on the day; Traders await the Fed tomorrow

The most recent inflation data from the US has shown a small increase although the market reaction has been fairly muted with traders possibly biding their time ahead of tomorrow’s Fed rate decision. Turning to the data itself a rise of 2.8% in Y/Y terms from 2.5% previously is a pretty large jump; although this was largely expected due to last May’s M/M change being an unusual drop of 0.1% which has now been replaced by a 0.2% gain for this year. 

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 Both the CPI and PCE Y/Y readings have been rising in the US for the past few years and the latest data points have extended the trend. Source: XTB Macrobond

The core reading, which strips our food and energy also increased, albeit by only 0.1% in this case to 2.2% which was in line with consensus forecasts. The headline reading of 2.8% Y/Y is the highest since January 2012 when a reading of 2.9% was seen as price pressure were falling and it further supports what looks like a near certainty that the Fed will hike rates once more in tomorrow’s meeting.

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 The USD is still lower on the day despite the higher inflation print, with only a handful of currencies performing worse than the buck. Source: xStation

In light of this it could be seen to be a little surprising that the USD is actually falling on the day, but this is all about expectations. US inflation was expected to rise today and with a 0.25% rate hike pretty much fully discounted according to derivatives markets, there’s no fresh positive news here for USD bulls. The press conference with chair Powell and the dot-plot may provide more ammunition for hawks but for now it looks like the buck has already got quite a high bar as far as expectations are concerned. 

We earlier looked in depth at the USDSEK so let’s now focus on the EURUSD - keep in mind there is also the ECB meeting this week which is previewed alongside the Fed meeting here. The market held longer term support around the 1.15 handle at the end of last month and could now be seen to be testing a key resistance around 1.1840. Taking the low of 1.1515 as the head the resistance around 1.1840 could be viewed as the neckline in an inverse head and shoulders setup. This setup would target a move to 1.2165, which itself is near a prior swing level, if it plays out in a textbook fashion with a break above 1.1840 the trigger. 

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The EURUSD is testing a potentially key resistance level around 1.1840 which could be seen to be the neckline in a larger S-H-S formation. Source: xStation

 

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