EUR/USD set to hit new highs as inflation could already be well in dollar's price

EUR/USD is pressured under 1.2150 amid the greenback's strength and ahead of new economic forecasts from the EU. All eyes are on US inflation, which is set to spark volatility. Yohay Elam, an Analyst at FXStreet, explains why US inflation data may trigger a rally.

See: EUR/USD set to plummet towards the 1.15 mark – Danske Bank

Speculation of inflation rearing its head

“A dark mood has gripped markets. The main reason is the fear of rising prices that would cause the Federal Reserve to raise interest. A long list of officials at the world's most powerful central bank has reiterated the message that price rises are "transitory" and would subside after a few months. Investors remain in disbelief. To top it off, escalating conflict in the Middle East adds worries and boosts the safe-haven dollar.”

“The headline Consumer Price Index is set to leap to 3.6%, a multi-year high, while Core CPI – which excludes food and energy – is forecast to advance from 1.6% to 2.3% YoY. Nevertheless, that would put it pre-pandemic levels, when inflation was considered healthy.”

“After the publication, Fed Vice-Chair Richard Clarida and Atlanta Fed President Raphael Bostic are set to speak. They will likely repeat the bank's message that inflation is transitory, due to base effects and bottlenecks that are set to subside. That could also calm the mood.” 

“The EU is scheduled to publish new economic forecasts, and they will likely consist of an upgrade to previous projections. Europe's accelerating vaccination campaign has been boosting investor confidence, as last seen by figures from Germany's ZEW institute.”

“On both sides of the pond, the immunization efforts are bearing fruit and crushing the coronavirus wave. The old continent is catching up with its Western world peers. This factor underpins the common currency.”