U.S. CPI Comes As Bombshell
InstaForex Group | Jul 14, 2021 05:19AM ET
Experts projected a downtick in the US annual inflation rate to 4.9% in June from 5.0% in May. In theory, this should have proven that rampant inflation was a transitory phenomenon and the situation would finally be back on the rails and nothing would challenge a brisk economic recovery. Such a state of affairs should have cemented the strength of the US dollar. In fact, this is what actually happened to the greenback.
The thing is that inflation in the US did not ease its pace but on the contrary surged to 5.4%, stronger than expected. The same score was last seen only in August 2008. In July 2008, the annual CPI leapt as high as 5.6%, thus setting the absolute record in the last 30 years. A higher reading was recorded in late 1990.
Interestingly, inflation growth should have knocked the US dollar down because it puts the economic recovery in jeopardy. However, nobody could have imagined such a sharp inflation increase. Fast inflation acceleration in the country with the world’s largest consumer market could set this trend in other economies.
Some other countries have already been hurt by growing inflation. More inflation records are yet to come. Perhaps, consumer prices will surge even more in other countries. As for the US CPI yesterday, the US dollar would have strengthened, no matter what inflation data was released. Probably, if the actual CPI were flat or a bit higher, the greenback could have lost footing for a while.
US CPI, y/y
Evidently, after the US dollar’s advance, a temporary drop would be a logical development. This will hardly happen in the European session today. The single European currency will be subdued by the data on EU industrial production which is expected to slow down its annual pace of growth to 25.1% from 39.3%. The data is certainly still disfigured by the low base effect. The crux of the matter is that it is all about a slowdown in the recovery rates. The clear bullish trend of the US dollar will not allow the euro to gain ground.
EU Industrial Production, y/y
Nevertheless, fresh statistics from the US today is likely to weaken the US currency. Producer prices could have climbed to 6.8% from 6.6%. It means that consumer inflation in the US is set to accelerate further. Fundamentally, a sharp increase in the CPI was the reason for the US dollar’s advance. So, it would be odd that the same reason would lie behind the greenback’s slide.
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The thing is that yesterday’s data caught investors completely off-guard. As a result, the US dollar has been seriously overbought. So, the market response to the US factory inflation could be different, unless the PPI logs the same unexpected growth.
US Producer Price Index, y/y
Yesterday EUR/USD displayed vigorous price action. Therefore, as soon as support of 1.1800 had been broken, the trading instrument came again under selling pressure.
Quiet trading is over, so the currency pair is again trading with higher volatility which is above average. Speculative trading has been on the rise.
Currently, EUR/USD is making an upward retracement because it is overbought.
Under such market conditions, we suppose that an upward retracement could push the price up to the area around 1.1800. We assume that EUR/USD could revive the selling interest once that level is reached.
From the point of complex indicator analysis, we see that in a 1-minute chart technical tools are generating buy signals amid a retracement. At the same time, a 1-hour and daily charts suggest selling opportunities because of the overall rapid bearish move.
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