U.S. Dollar Gains Ground As Inflation Surges To Multi-Decade Highs

Key Insights

• U.S. Inflation Rate climbed above the 9% level in June. 
• The U.S. dollar received additional support after the release of the report but faced resistance at yearly highs. 
• Markets may start to price in a possibility of a 100 bps rate hike at the next Fed meeting. 

Inflation Rate Hits 40-Year Highs

The U.S. Dollar Index tested new highs after the U.S. reported that Inflation Rate increased by 9.1% year-over-year in June, compared to analyst consensus of 8.6%. On a month-over-month basis, Inflation Rate grew by 1.3%. Core Inflation Rate increased by 5.9% year-over-year.

The U.S. Dollar Index made an attempt to settle above 108.50 after the report was released. However, it faced resistance and pulled back.

The report had a significant impact on S&P 500, which found itself under material pressure at the start of the trading session. Bitcoin, which is sensitive to risk appetite, also moved lower. Gold declined towards the $1700 level but received support near $1710 and rebounded towards $1730.

The markets’ reaction to the report shows that many traders were prepared to hear bad news. The initial reaction was to buy the dollar and sell everything else, but it looks that some assets may find support today.

What’s Next For The U.S. Dollar?

The next inflation report can be better as oil prices have declined materially from their June highs. However, inflation remains a serious problem, so the Fed will have to act.

Currently, traders believe that there is a 53.6% chance that the Fed will raise the target rate by 75 bps on July 27, and a 46.4% chance that the Fed will increase the rate by 100 bps.

Despite market indications, a huge 100 bps rate hike looks unlikely at this point. Such a rate hike will put significant pressure on the economy and may even hurt employment.

The inflation reports were bullish for the U.S. dollar. In the near term, some traders may want to “sell the news” after the recent rally. However, the U.S. dollar may get additional support ahead of the Fed meeting as risks of a potential 100 bps rate hike are currently not priced in by markets.

Traders should closely monitor the dynamics of EUR/USD, which is stuck near the psychologically important 1.0000 level. In case EUR/USD manages to settle below this level, the American currency will gain additional upside momentum, and the U.S. Dollar Index will move towards the 110 level.

For a look at all of today’s economic events, check out our economic calendar.