The US dollar reacted fairly calmly to a weak rise in US inflation. Almost all components of today's release were in the "red zone", that is, worse than the predicted values. The phlegmatic reaction of the market looks atypical - especially now, when rumors are spread among traders about a preparation of the Fed's rate cut. On the one hand, the market was ready for weak CPI figures - even preliminary forecasts spoke of weak inflation dynamics. On the other hand, the real data turned out to be even weaker than the forecasts, which indicates a persistent tendency to weaken the key indicator for the Fed.
Thus, core inflation (consumer price index excluding prices for food and energy) on a monthly basis remained at the level of 0.1%. At this level, the indicator has been released for the past four months. In annual terms, the index came out at a two percent level, although experts expected growth to 2.1%. The index went below this value only in February last year. The general consumer price index was also in the "red zone" - both in annual and monthly terms. In May, the consumer price index rose by only 0.1% m/m and 1.8% y/y, while analysts expected to see CPI at 0.2% and 1.9%, respectively.
As you can see, the indicators did not reach the lowest predicted values. At the same time, it is already possible to speak about a rather persistent trend of slowing inflation: indicators gradually, but nevertheless systematically slow down their growth. Immediately after the publication, the euro-dollar pair "shot" to the mark of 1.1350. However, the upward impulse almost immediately choked - the price returned to the bottom of the 13th figure, and then lower, updating the daily low.
The fact is, the market was ready for such results. To be more precise, traders were not surprised by this trend, given the dynamics of the past months. After Jerome Powell made the rate cut in the foreseeable future, and Nonfarms came out much worse than expected, the dollar significantly fell against a basket of major currencies. Low inflation only added to the overall negative picture, but no more. Even before today's release, the likelihood of a rate cut at the July meeting was almost 60%. At the moment, this probability has increased to 65%, but in the context of general expectations, such an "increase" did not have a significant impact on the dollar. Let me remind you that yesterday Trump again criticized the Fed for a too high rate. He also complained that the euro and other currencies are devalued against the dollar, and in many respects this is the "merit" of members of the US regulator, who, according to Trump, "do not understand anything at all."
The US president's criticism increased the likelihood of the Fed easing monetary policy, but did not affect the foreign exchange market. By and large, Trump is helpless regarding the Fed: he cannot dismiss the head of the regulator with a stroke of a pen, as numerous White House officials. Therefore, his criticisms were actually ignored by the market.
Thus, traders surprisingly quickly won back today's release, calmly embracing weak inflation data. Having sustained a blow, the eur/usd bears launched a counter-offensive, taking advantage of the weakness of the single currency. It is worth noting here that the euro still does not have its own strength for growth, therefore, the upward dynamics are due, as a rule, to the devaluation of the greenback. Today, the dollar has withstood, but the single currency again came under pressure from Italian problems. Thus, the "League of the North" party, whose members are members of the coalition government, proposed issuing national mini-bills. They plan to use them to repay debt obligations to companies (and residents of the country will be able to use them to pay taxes). By and large, we are talking about the creation of a parallel currency in Italy. In particular, the head of the Ministry of Finance of Italy spoke out against this idea, warning about the negative consequences of such a move. But the ruling parties have long been trapped in their own election promises, so the introduction of this tool is being seriously discussed by the leadership of the League.
In general, Rome and Brussels continue to be in tough confrontation with each other, voicing quite harsh accusations. Europe blames Italy for populism and waste, Italy, in turn, blames the EU for slowing the country's economic growth. In addition, the threat of a disciplinary procedure from Brussels hung over Italy. Yesterday, EU ambassadors agreed that penalties against Italy for excessive public debt are "justified". Now the European Commission must decide whether to start a procedure that could lead to financial sanctions against Rome, or give the Italians another chance.
Thus, today, the market has virtually ignored the release of weak data on the growth of US inflation. Perhaps this info service is still waiting in the wings, but today traders have shifted the focus to European events. Despite the corrective pullback in price, the eur/usd pair is still in an upward trend. On the daily chart, the price is still between the middle and upper lines of the Bollinger Bands indicator, and the Ichimoku indicator shows a bullish "Parade of Lines" signal. The closest support level is the 1.1280 mark - this is the upper boundary of the Kumo cloud. It should be noted that the upward trend will lose its relevance only with a more significant decrease, namely below the mark of 1.1210 (the middle line of the Bollinger Bands, which coincides with the lower boundary of the Kumo cloud on D1).
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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