The euro has posted considerable losses on Wednesday. In the North American session, EUR/USD is trading at 1.2076, down 0.60%.
US inflation higher than expected
There was plenty of anticipation ahead of the April inflation report, and it certainly did not disappoint, with readings much higher than the consensus. Headline CPI rose 0.8% (MoM), crushing the estimate of 0.2%. It was a similar story for Core CPI, as the gain of 0.9% easily exceeded the forecast of 0.3%. The headline reading was the highest since 2009 and the core read was even more impressive, with its highest reading since 1982.
On an annual basis, the inflation numbers were unusually high. CPI jumped to 4.2%, while the core CPI measure rose 3.o%. However, it should be noted that these figures are distorted since the comparison is with CPI data at the height of the Covid pandemic. Even so, the April figures could lead to calls for the Federal to re-examine policy.
The sharp rise in CPI has pushed US 10-year yields slightly higher, which has lifted EUR/USD on Wednesday.
Fed Chair Powell has insisted that inflationary pressures as the economy recovers are only transitory and that a massive amount of stimulus is still needed until the economy is more robust, particularly in the labour market. This view has been challenged, including by Fed members. Robert Kaplan, a non-voting member, recently urged the Fed to talk about tapering QE earlier rather than later, and this inflation report will provide ammunition to his stance and could attract other Fed members.
Will the higher inflation numbers nudge the Fed to consider tapering in the next few months? If Fed policymakers even hint that that is an option, it could have a significant effect on the financial markets. Any talk from the Fed about tightening policy would be bullish for the US dollar.
EUR/USD Technical
- EUR/USD faces resistance at 1.2227 and 1.2292
- On the downside, there is support at 1.2042 and 1.1922
