The US inflation data turned out to be rather downbeat as expected. Markets continued to test highs. This reaction can be attributed to the fact that the rise in prices slightly exceeded the forecasted values, which means that the Fed will not rush to tighten monetary policy.
The core consumer price index rose by 0.7% in May, its highest rate in 40 years. Of course, the index decreased slightly against an increase of 0.9% in April. However, this does not change the situation as the indicator continues to beat long-term records.
On an annual basis, consumer prices climbed by 3.8%, the highest level since 1992. At the same time, headline inflation, which takes into account such volatile items as food, jumped to 5% year-over-year.
Now let's take a look at the indicators in the labor market.
The unemployment rate fell to 5.8%, while economists expected a worse indicator. At the same time, the number of jobless claims decreased last week. This suggests that the labor market is gradually recovering. Notably, payments as part of the family support program will be reduced in the near future. This will most likely accelerate the pace of recovery.
To make it sound convincing, let us recall the recent announcement that US Fed's reverse repo volume has surged to a 5-year high. There is a surplus of liquidity accumulated in the financial system over the past 6 years. Moreover, this can hardly be called news. This is a fact.
Thus, the US sees a record rise in the core consumer price index, the labor market's recovery, and a colossal amount of liquidity.
What to expect from the Fed?
Senior representatives of the US central bank have already spoken about their intentions to cut the support program's funding. These are not just rumors and individual conclusions of market participants. These are official statements. For now, the plan relates to the secondary market. However, this can be already taken as a signal for the subsequent tightening of monetary policy.
Next week's macroeconomic calendar includes the Fed's meeting. This event will be in the focus of traders. The main question is whether the Fed will hint at the beginning of a reduction in bond buybacks. After all, this topic still serves as support for US Treasury yields, which began to decline again, indicating a strong appetite for risk.
Market participants are hoping to receive some clues from the Fed at the June meeting. However, the regulator will hardly give them. The central bank is famous for its ability to lull market players into a false sense of complacency. Therefore, the Fed is likely to say that this rise in inflation is a temporary phenomenon, anf the economy is still facing difficulties, but everything will be fine soon.
As for excess US dollar liquidity in the market, this topic cannot be ignored for a long time.
The US currency failed to benefit from accelerated US inflation. US Treasury yields continued to fall instead of advancing. Market participants do not seem to believe that the Fed will start phasing out its $120 billion monthly bond-buying program. Many economists attribute the rise in inflation to higher prices for clothing, airline tickets, and used cars. This means that the acceleration in prices was not caused by structural changes but the lifting of restrictions after the pandemic.
The US dollar has no chance of growth without new drivers. In addition, market players may express distrust of the Fed. It is unlikely, but the greenback still has a chance for a short-term rebound. Of course, this is not about a trend change. The trend remains downward. As for the US dollar index, the 89.50 mark can be seen as the nearest target for sellers.
On Friday, traders will focus on the University of Michigan's preliminary consumer sentiment index for June. According to forecasts, the indicator will rise. Particular attention will be paid to the inflation component. Nevertheless, the US dollar could come under pressure again.
Will the EUR/USD pair be able to rise above 1.2200? At the moment, the single currency failed to consolidate above 1.2180. From time to time, the quote approaches the resistance level of 1.2190. As long as the EUR/USD pair remains between these values, most traders will most likely take a wait-and-see approach. Volatility may increase after the price tests the level of 1.2200. In this case, buyers will be able to drag the price to 1.2300.
The levels of 1.2160 and 1.2140 now act as support. If they are broken downwards, the bearish scenario will be relevant.
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