Sources: Fred | St Louis Fred
In yesterday’s trading session, the markets reacted positively to the release of the Consumer Price Index (CPI) data, which showed a convincing slowdown in inflation. Headline CPI fell by 0.1% month-on-month (MoM), defying predictions of a rise. Core CPI, which excludes food and energy prices, also came in lower than expected at +0.1% MoM versus the forecasted +0.2%. This marks the first time in twelve months that Core CPI has beaten expectations, with the current figure significantly below the all-time average change of 0.29%.
Sources: Fred | St Louis Fred
The moderation in inflation, particularly in housing costs, has fueled optimism among investors. Shelter prices increased by only 0.2% MoM compared to the previous rate of 0.4%, indicating a slowdown in housing inflation. Other components, such as owners’ equivalent rent and primary rent, also showed signs of softening.
Implications for the Federal Reserve
The encouraging CPI data has strengthened the argument that the Federal Reserve may begin loosening monetary policy within this quarter. While a rate cut in July remains unlikely, the market is now pricing in 21 basis points of easing for September and 61 basis points by the end of the year. Investors will be closely monitoring comments from Fed officials following the CPI report, although a more formal shift in communication might be reserved for the Jackson Hole symposium in August.
Impact on the Dollar and Global Currencies
The dollar experienced a notable decline following the CPI release, which was further impacted by Japanese foreign exchange intervention that bolstered the yen. Although this move faded in the broader FX market, it reflects investors‘ reluctance to engage in a broad-based dollar decline despite positive inflation data. Factors such as political uncertainty in the eurozone and the potential for a Trump re-election are contributing to this cautious stance.
Looking Ahead: PPI Data and Michigan Survey
Today, the focus shifts to the Producer Price Index (PPI) data, which is expected to come in slightly higher than last month’s MoM figures. Given the CPI results, there is a possibility of unexpected outcomes with the PPI as well. Additionally, preliminary data from the University of Michigan survey will be released, providing insights into consumer sentiment and economic direction. This survey is a leading indicator and, if lower than expected, could suggest that the Federal Reserve may consider easing interest rates sooner, potentially injecting the economy with more liquidity on the other hand higher than expected shows that the consumer sentiment of United States is looking positive and we could expect a much softer landing.
Market Expectations and Currency Movements
Sources: Fred | St Louis Fred and Yahoo Finance
The correlation between the Michigan survey and the S&P 500 suggests that a growth in this survey result could support the ongoing narrative of tackling inflation and economic growth forward looking. Should this happen, it might convince the Fed to ease rates, benefiting stock markets but potentially leading to a further decline in the dollar. In such a scenario, currencies like the euro (EURUSD) could see appreciation in the near term.
Source: TradingView
Recent CPI data shows inflation slowing down, bolstering expectations for a weaker dollar as markets anticipate potential Federal Reserve easing within the next 1-3 months.
Technical Breakdown: EURUSD Triangle Formation
- Pattern Formation
- EURUSD is forming an Elliott Wave-based triangle pattern.
- Points of oscillation: A, B, C, D, and E.
- Key Level
- The critical trigger point is at 1.091.
- Breaking this level would be significant as it hasn’t been surpassed since July 2023.
- Implications of Breakout
- A breakout above 1.091 would complete the triangle pattern.
- It signals a potential shift to a bullish trend.
- This could lead to upward momentum targeting higher resistance levels.
- Supporting Fundamentals
- Slowing inflation and dovish Fed expectations support the technical bullish outlook.
- PPI data and University of Michigan survey could further confirm the trend.
- Market Sentiment
- Markets are pricing in a weaker dollar.
- Anticipated Fed easing aligns with the potential bullish breakout in EURUSD.
Summary
Watch for a breakout above 1.091 in the EURUSD pair, which would align with the current fundamental landscape of easing inflation and a potentially dovish Federal Reserve, setting the stage for a bullish move.
Disclaimer: For educational purposes only. Trading comes with substantial risk, leading to possible loss of your capital. Traders are advised to do their own due diligence before investing.
