FX.co ★ 11.04.2024: Hotter-than-expected inflation propels USD rally. Fed needs more statistics

Today, the euro is trading steadily ahead of the ECB policy decision. However, the market cannot calm down after yesterday’s surprises from the US economy. In addition, the next series of US inflation reports will be released on Thursday. So, markets will try to find out clues to whether the ECB and the Federal Reserve will begin to diverge on rate-cut policies this year.

On Wednesday, unexpectedly strong US inflation reports significantly pushed back the timing of the first rate cut for the US central bank. Stubborn inflation combined with strong economic growth and a healthy labor market reduces the likelihood of a rapid rate cut in the US to almost zero.

This was indirectly confirmed in the speech by Richmond Fed President Thomas Barkin. He said on Thursday that "the latest inflation data looks the same as disinflation at the end of 2023, with prices of goods falling and prices of services rising." Consumer prices have not yet reached the level required. “Although in the long term it is moving in the right direction,” the policymaker added.

Fed officials still intend to cut rates at some point during the year, minutes from the Fed's March meeting showed. However, they want more signals about a sustained slowdown in inflation.

Neither yesterday's reports nor the statistics published in the US today can definitely guarantee such confidence. By the way, after the hawkish revaluation, the FedWatch tool now signal only two rate cuts. Let me remind you that a few months ago – in December 2023 – the number of rate cuts was 7.

The hawkish outlook for the Fed’s policy has moved US stock indices into the red zone. But the S&P 500's losses of around 1% came largely due to fading risk sentiment. Today, the index is still trading high, moving within the intraday corridor between 5,138 and 5,178.

The rally in the US stock market is unlikely to be disrupted due to more aggressive expectations regarding the Federal Reserve's policy. The S&P 500 will be driven to current and, no doubt, future high by the hype surrounding artificial intelligence.

As for the US dollar, huge opportunities for further growth have opened for the greenback. After a successful Wednesday and a jump in the US dollar index of more than 1%, the greenback can finally forget about the stagnation in which it has spent most of this year. There is volatility and new peaks ahead.

On the other hand, the US dollar is expected to settle at highs on the back of elevated interest rates set by the US regulator. Therefore, analysts do not rule out an outflow of funds from carry trades into the US currency. In any case, today the US dollar traded again at its highest level since November against a basket of major currencies.

At the same time, it literally surged against the euro and also spiked by 1% against the yen. The US dollar index is trading higher today towards 105.3 until the release of new statistics for the US and the ECB policy statement.

The US producer price index for final demand, excluding food, energy, and trade services, rose by 2.8% in March from a year ago. On a monthly basis, the PPI grew by 0.2%.

Factory inflation accelerated by 2.4% in March in annual terms. Some other indicators from this survey came out at previous or slightly lower levels.

In a separate report, the number of initial unemployment claims fell to 211 thousand, thereby indicating a strong labor market in the US. The comparison of the US and European economies is clearly not in favor of the EU. It means that in the near future the eurozone central bank will have to cut rates faster than its American counterpart.