XM Group | Jul 10, 2023 09:04AM ET
Central banks appear to have won the initial fight against skyrocketing prices but the war on inflation isn’t quite over as there is now a new battle – sticky inflation. This couldn’t be more evident in the United States where inflation rose quickly to peak just above 9.0% exactly a year ago and appears to be falling just as fast. However, core inflation, which is a more reliable indicator of what’s happening to price pressures underneath the surface, has remained stubbornly high, declining only marginally this year.
Core CPI stood at 5.3% y/y in May, fractionally lower from 5.7% in December but significantly above the headline rate of 4.0%. The picture is even worse when looking at the alternative core PCE price index, which has been stuck between 4.6% and 4.7% since December.
(Slowly) Going in the right direction
When viewed against an ongoing tight labour market, a flatlining trend in core inflation well above the 2% target is hardly what the Fed was hoping it would have achieved by mid-year, having raised rates by 500 basis points in the course of just 15 months. The June figures are not anticipated to provide much relief either.
However, if the inflation data is on the soft side, particularly if core CPI falls more than expected, the euro could have another attempt at overcoming the $1.1075 resistance before eyeing the 61.8% Fibonacci of $1.1274.
Diverging paths
More broadly though, the dollar’s outlook has become somewhat complicated, not just because of the Fed’s foggy policy outlook, but also because of the varying degrees of divergence with other central banks.
The pound for example is the least likely to suffer should the Fed not disappoint in hiking again as the Bank of England is almost guaranteed to do the same to tackle the UK’s persistent inflation problem. The yen on the other hand is in danger of revisiting the more than three-decade lows from October 2022 as the Bank of Japan has yet to signal its willingness to begin the process of unwinding its massive stimulus.
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