Running into the last FOMC we had expected a ‘buy the rumour, sell the fact’ response. We got that, but it was short-lived as slowing global growth fears gave the USD a bid. Furthermore, US 10-year yields pushed higher on fears that the Fed is going to have to keep up the aggressive pace to curtail creeping inflation. Where will the weakness for the USD come from? The most likely place is from the US inflation data on Wednesday.
All about inflation on Wednesday 11 May @ 13:30UK time
The last headline inflation print for the US came in at 8.5% y/y and 6.5% y/y for the core. The expectations for the print are that the headline will drop to 8.1% and the core inflation rate will drop to 6%.
What’s the significance of inflation data for the USD
The Fed’s aggressive policy action in hiking rates so quickly is to try and reduce inflation as soon as possible. All central banks have a clear mandate to keep inflation contained and the current level of US inflation is more than 4 times what their target 2% level is. So, if we see a fall in inflation pressure this will reduce the urgency of the Fed to hike rates and this should weaken the USD.
What to look for
A short USD trade could come from a below minimum expectation print for the headline and the core print. So, this print below should allow the USD to weaken and lift the EURUSD pair:
- US inflation rate y/y: a print below 7.9%
- US core inflation rate y/y: a print below 5.8%
If, on the other hand, the inflation print comes in higher than expected and above 8.% y/y for the headline and 6.5%y/y for the core then that should keep the USD supported, at least in the near term.