The publication of US consumer inflation data on Tuesday had a significant impact on the dynamics of the currency market and on all financial markets in general, which entirely confirms the fact that both the Fed and investors expected a sharp increase in inflationary pressure amid the strong recovery of the country's economy due to some weakening of the impact of the COVID-19 pandemic, as well as the availability of various programs to stimulate the economy and support the citizens of the country.
Based on the presented data, American consumer inflation surged by 0.6% on a monthly basis in March against the forecasted growth of 0.5% and growth of 0.4% a month before that. On an annualized basis, the consumer price index increased to 2.6% against the expected growth of 2.5% and the previous value of 1.7%.
Last month's core consumer inflation added 0.3% against 0.1% in February and expectations for a 0.2% increase. In annual terms, the indicator rose by 1.6% against 1.3% in the previous period under review and expected increase of 1.5%.
The reaction of the market to this news is quite unexpected. It seems that we can say that investors reacted yesterday to more-than-expected high consumer inflation values on the principle of "buy on expectations and sell after the fact", as the reaction was strong and logically incorrect. It can be explained by the fact that the US dollar received support before the release of statistics precisely on the expectations of strong inflationary values, and consolidation of the US stock market and US Treasury yields. We believe that the market reaction would be completely different if the values of consumer inflation, both general and basic, were even higher. If this happened, the reaction would be unequivocally positive for the dollar and the Treasury yield, while negative for the stock markets.
And although the US dollar weakened on Tuesday, and the dynamics of Treasury yields turned out to be slightly negative, the downward movement was briefly suspended, which can be explained by the cancellation of the factor of buying on expectations and selling in fact. Now, the markets will closely monitor today's updated economic statistics from the US in order to understand whether inflation will continue to rise in the future or, as the Fed assumes, will indeed turn out to be local.
Against this background, we believe that the US dollar will remain under local pressure, and the stock market may continue to increase, since the markets will switch their attention to the recovery and growth of the US economy, postponing the factor of increasing inflationary pressure temporarily.
Forecast of the day:
The EUR/USD has broken through the range of 1.1860-1.1920 and is trading above the level of 1.1945. We believe that it will receive support and continue to grow, first to 1.1985, and then to 1.2030, if it consolidates above this level.
The GBP/USD pair moved above the level of 1.3780, which opens the path towards the levels of 1.3850 and then 1.3900.