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US CPI Preview: fresh clues for the Fed

  • US inflation in April seen steady above the 2.0% Fed's target.
  • Divergences between expectations and outcomes have no chances of changing Fed's stance.

The American dollar is pulling back from multi-month highs but is surely the strongest currency across the board, ahead of the release of the critical US inflation report. Enthusiasm for the greenback began mid-April, with some pauses in the way, but no looking back, and the currency is clearly overstretched, particularly against its European rivals. But discouraging data from those economies have added to dollar's momentum and limited chances of interesting corrective movements.

Increasing hopes that the Fed will raise rates three times or more this year were triggered by solid macroeconomic data, although inflation has been the key factor behind the cautious path drawn by the Fed during the last couple of years.

US inflation is expected to have advanced 0.3% MoM in April after sliding 0.1% in the previous month, while yearly inflation is expected to have advanced to 2.5% from the previous 2.4%. The more relevant core yearly reading is seen at 2.2% after falling to 2.1% in the previous month, still below the 2.3% peak reached earlier this year.  This numbers should be supportive of another rate hike ahead, even if they result below market's expectations.

But there are little chances that higher-than-expected figures could change the Fed's stance, after the latest stance from the central bank included the word "symmetrical" when referring to inflation, somehow indicating that policymakers are willing to tolerate pivoting inflation around the 2.0%.

Still, a strong reading could boost an already bullish dollar, as today's decline seems a mere correction, and some profit taking ahead of the event.

In the case of the EUR/USD pair, there's an additional macroeconomic factor to take into account: EU inflationary pressures have been decelerating, which reduced chances of the ECB trimming QE in September, highlighting the imbalances between both central banks.

EUR/USD Technical outlook

The EUR/USD pair trades at its lowest for the year, and the daily chart shows that it has fallen below all of its moving averages, with the 20 DMA accelerating well below the 100 DMA and pointing to extend its slide below the 200 DMA, something usually understood as a strong continuation signal. Technical indicators in the mentioned chart, however, have been hovering within oversold territory since late April, starting to draw a possible bullish divergence, not yet confirmed.

The trend could clearly continue after the current correction, moreover if the pair remains below the 1.1900 figure today, with a break below 1.1800 opening doors for a decline toward the next key long-term support at 1.1660. Beyond 1.1900, resistances come at 1.1950 and 1.2000. But even up to this last the movement will remain as corrective.

Author

Valeria Bednarik

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

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