US Dollar Index: Strong April CPI throws a lifeline, but the Fed limits upside potential – Westpac

The startling 0.9% lift in the April core CPI, the largest since 1981, delivered a Lazarus-like reprieve for the US Dollar Index. Nevertheless, the Fed is likely to stick to its “transitory” guns, limiting upside potential. Therefore, in the view of economists at Westpac, medium-term DXY bear trend is still intact.

The economy is apparently generating fewer jobs, but more inflation than expected

“DXY appears to have found a near term base just above 90, the dramatic upside surprise on the April CPI throwing it a lifeline. But even though DXY seems primed for a bounce within prevailing ranges (89-93), conviction levels are understandably low given the wild swings in marquee US data in recent days.”

“Fed officials continue to underscore policy patience and a hard slog back to long term health for the economy, but recent days have also produced a subtle messaging shift. Both Brainard and Clarida noted that the Fed has the tools to guide inflation if it proves more persistent than expected, language that Fed officials have not felt compelled to use for some time.”

“While the near term DXY outlook is more encouraging, the medium-term bear trend is still intact. Eurozone’s reopening metrics are looking more upbeat by the day and the EC is poised to commence joint bond issuance under the region’s post-pandemic Recovery Fund in July.”