Title: U.S. Dollar Slips After Inflation Falls Below Estimates – Market Impacts Across Major Forex Pairs
Author: Based on original content by James Hyerczyk, FXEmpire
The U.S. dollar experienced a notable pullback following the release of the latest Consumer Price Index (CPI) report, which showed inflation growing at a slower pace than expected. The news raised investor speculation that the Federal Reserve might pivot toward a more dovish monetary policy sooner than anticipated. As inflation pressures appear to ease, currency pairs including EUR/USD, GBP/USD, USD/CAD, and USD/JPY all saw significant reactions.
Below is a comprehensive breakdown of how the latest inflation data affected the U.S. dollar and major currency pairs.
U.S. CPI Report: Slower Inflation Boosts Dovish Fed Expectations
The U.S. Bureau of Labor Statistics released April’s CPI data on May 15, 2024. The report revealed that both monthly and yearly inflation measures came in weaker than expected.
Key highlights from the report:
– Headline CPI rose by 0.3% month-over-month, below the 0.4% consensus forecast
– Year-over-year CPI increased by 3.4%, also lower than the projected 3.5%
– Core CPI, which strips out food and energy prices, rose by 0.3% month-over-month
– Year-over-year core inflation came in at 3.6%, slightly beneath the anticipated 3.7%
The lower-than-expected inflation prompted a shift in market expectations about the Federal Reserve’s next moves. Many investors now anticipate that interest rate cuts could be on the horizon, potentially as early as September 2024.
Market Reaction:
– The U.S. Dollar Index (DXY), which tracks the dollar against a basket of six major currencies, dropped from 105.25 to 104.30
– Treasury yields fell sharply, with the benchmark 10-year yield dipping below 4.35%
– Equity markets rallied, with the Nasdaq and S&P 500 hitting new highs due to lower rate expectations
EUR/USD: Gains on Soft Dollar and Improving Eurozone Sentiment
The EUR/USD pair rallied significantly on the back of the dollar’s retreat, surging to its highest level since March 2024.
Factors contributing to the euro’s rise:
– Weaker U.S. inflation led to a weaker dollar, making the euro more attractive
– Eurozone economic sentiment has improved slightly, with recent industrial production and services PMI data surprising to the upside
– European Central Bank (ECB) officials have maintained a cautious tone on rate cuts, contrasting with growing expectations for a dovish turn by the Fed
Technical outlook for EUR/USD:
– On the 4-hour chart, EUR/USD broke above a key resistance zone near 1.0850, turning it into support
– Next resistance levels: 1.0940 and 1.1000
– Short-term momentum favors bulls, with the RSI nearing overbought territory
GBP/USD: Pound Strengthens Amid Dollar Weakness and Stable UK Outlook
The British pound also benefited from the dollar’s decline, with the GBP/USD pair climbing toward the 1.2700 level.
Supporting factors:
– UK economic data has shown signs of stabilization, with GDP growing modestly in Q1 2024 at 0.6%
– Bank of England (BoE) officials have signaled a cautious approach to monetary easing, suggesting that inflation easing will warrant gradual rate adjustments
– Wage growth in the UK remains elevated, decreasing the urgency for rate cuts compared to the U.S.
Key technical levels for GBP/USD:
– Immediate resistance lies at 1.2710 followed by 1.2800
– Support levels are seen at 1.2620 and 1.2535
– A breakout above 1.2710 could accelerate bullish momentum toward March highs
USD/JPY: Dollar Weakness Offset
Read more on USD/CAD trading.