Yesterday’s red-hot CPI print put the rate issue back on the table as investors become increasingly spooked that to curb inflation the Fed could dial back its bond buying programs and raise interest rates sooner than expected.
According to the CME FedWatch Tool, the probability of a rate hike is 9% in June and September, and 8.8% in December. Fed Chair Powell has warned of a transitory surge in inflation and pledged to keep rates unchanged until inflation and employment market targets are met. First, Fed members will start talking about tapering QE, after which they will cut back on programs, then cancel them, and only at that point will they start getting markets ready for a rate hike.
Today’s macro agenda (GMT 3)
- 15:30 US: PPI (April) and initial jobless claims (April)
- 18:00 BoC Governor Tiff Macklem speech
- 19:00 BoE Governor Andrew Bailey speech
Earlier this morning, the EURUSD price action stabilized at 1.2065. The single currency recovered to 1.2106 amid gains in the EURGBP cross pair and a decline in UST yields. By the time of writing, major currencies were trading in the green. The euro tops today’s leader board.
Investors showed a knee-jerk reaction to the US CPI figures, although opinions were divided. On the one hand, higher inflation reflects economic recovery. But on the other hand, excessively hot consumer prices tend to increase costs for companies and decrease their profits.
The US10Y yield crept back to 1.68%, with key support at 1.65%. If the support level fails to hold, everyone will forget about the inflation report until next month. No decisions are taken based on a single report.
The euro is going through a correction. Resistance is at 1.2120, where several levels are located (the trendline (3), the 45-degree angle (2), and the balance line (55-day SMA)). Buyers need to breach 1.2125 and sellers need to hold that spot. The recovery of EURUSD pair is underpinned by major euro crosses. Europe’s economic calendar is an empty slate today, so it will be easier for buyers to reach their target. The target for sellers is 1.2020.
Bottom line: the market is recovering after yesterday's April US inflation report. In our view, investors overestimated the importance of this reading, since Jerome Powell has repeatedly warned about a transitory surge above 3%. The euro recovered to 1.2106, supported by euro crosses and a decline in Treasury yields. Resistance is at 1.2120, where several levels are located. The faster buyers can break out, the higher the odds will be of a leg up to 1.2180. The target for sellers is 1.2020.