We have often noted that the forex currency markets may remain completely calm until the markets and investors react to the US inflation figures. This may be a strong reaction to the future of raising US interest rates.
- Weak US inflation readings helped the bulls push the EUR/USD price towards the psychological resistance level of 1.1000, which is stable around it at the time of writing the analysis.
- In response to the weakness of the headline, traders sold the dollar and bought gold, silver and bonds.
- Stock index futures and crude oil also jumped. Overall, EUR/USD is making higher lows since it held key support around 1.05 in early March.
- The euro's rise has been nice and steady.
As the price stabilizes above the 21-day exponential moving average and the main support at around 1.0800, the general trend of the currency pair remains bullish, thus it remains on its way to climb above February's high at 1.1033 soon.
A weaker US CPI reading has raised doubts about whether the Fed will raise interest rates at all next month, after a 25 basis point hike was priced with a 75% probability of the FOMC meeting on May 3. Now, that probability has dropped to around 66%, indicating that investors feel that the Fed is nearing the end of the picnicking cycle, they will feel more comfortable now.
Until the release of the stronger US non-farm payrolls report on Friday, the US data trend was negative surprises, and the market was correspondingly re-pricing to cut the expected interest rate path from the US Federal Reserve. This repricing caused a significant downward move in the dollar's price until the US Nonfarm Payrolls data provided some relief for the greenback. The market will be constantly wondering if more rate hikes are imminent, which is why there was so much interest in today's CPI release.
The immediate market response seems to be that we are now much closer to the peak in terms of rate hikes, now that inflation has cooled down to 5.0% y/y in March and therefore continue on its trend of weakening price pressures. The reading of 5% on the main front was weaker than the 5.2% expected, and fell sharply from the 6.0% recorded in the previous month. Core inflation came in as expected, however, rising to 5.6% from 5.5% previously.
I suppose the fact that the core CPI is rising will prevent the US dollar from falling significantly further. Moreover, lower energy was the biggest driver of the annual contraction in the headline CPI reading, but with the price of crude oil back above $80 a barrel in light of last week's surprise OPEC decision, this could provide a fresh inflation jolt in the coming months.
For now, investors will be happy to see a drop in headline inflation, which will keep the dollar under pressure for a while.
Euro predictions against the dollar today:
The weak US inflation readings might give the bulls more momentum to breach the resistance at 1.1035, the highest for the currency pair in a year. At the same time, overcoming this resistance will move the technical indicators towards overbought levels, and currently the closest resistance levels for the EUR/USD pair are 1.1045, 1.1120, and 1.1200, respectively. In the event that the US GDP numbers - an additional inflation reading - and the US weekly unemployment claims number are positive, the dollar may find the opportunity to compensate for some of its losses. Accordingly, the support levels 1.0920 and 1.0880 may be the most important, and breaking the latter is a breach of the current bullish trend.
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