US Dollar (DXY): Inflation Rise Falls Short of Expectations, Fed Rate Hikes in Question

Highlights

• U.S. inflation data shows slower-than-expected rise in consumer prices.
• Market expectations of Fed maintaining interest rates surge to 95%.
• Investor sentiment rises as traders anticipate potential rate hikes in July.

Overview

The U.S. dollar is lower on Tuesday as the release of crucial U.S. inflation data indicated a slower-than-expected rise in consumer prices in May. This development has led to increased market expectations that the Federal Reserve will maintain its interest rates, with the likelihood surging to around 95% from the previous 75%. Consequently, investor sentiment has risen as traders anticipate the Fed’s decision, potentially leaving the door open for rate hikes in July.

CPI Rises, Annual Rate Eases

The latest data revealed that the Consumer Price Index (CPI) rose by 0.4% on a monthly basis, aligning with expectations. However, the annual rate eased to 5.3%, down from the previous month’s 5.5%. The inflation rate in May reached its lowest annual level in about two years, with the overall Consumer Price Index rising by just 0.1% for the month, resulting in an annual level of 4%. This represents the smallest 12-month increase since March 2021 when inflation began to rise.

Consumers Impacted by Core Inflation Rise

Excluding volatile food and energy prices, core inflation rose by 0.4% on the month and remained 5.3% higher than the previous year. This suggests that while price pressures have eased somewhat, consumers are still experiencing the effects of inflation. Notably, these figures aligned with the Dow Jones consensus estimates.

Euro Strengthens Ahead of ECB Rate Hike

Following the data release, the U.S. dollar index reached its lowest level since May 22, while the 10-year U.S. Treasury yield dropped by 7 basis points to its lowest level in nearly a week at 3.682%. Simultaneously, the euro strengthened, causing the dollar index to decline. The British Pound also experienced a significant surge against the dollar due to better-than-expected employment data, fueling expectations of further interest rate hikes by the Bank of England.

The euro saw a 0.37% increase, reaching $1.079, briefly touching its highest level since May 23. Consequently, the dollar index, which measures the currency against six major peers, dropped 0.26% to 103.32. The weakening of the dollar can be attributed, at least in part, to market expectations of a potential pause in monetary tightening by the Federal Reserve.

British Pound Jumps on Employment Data

Meanwhile, the British pound registered a 0.46% surge against the dollar, reaching $1.257. This was driven by stronger-than-expected employment data and rising wages, leading traders to anticipate more aggressive interest rate hikes by the Bank of England. Although slightly below Monday’s one-month peak, the pound remains in a favorable position.

ECB, BOJ Policy Decisions on Tap

Looking ahead, market focus now shifts to the upcoming monetary policy decisions by the European Central Bank (ECB) on Thursday and the Bank of Japan on Friday. It is widely anticipated that the ECB will raise rates by 25 basis points, while the Bank of Japan is expected to maintain its ultra-dovish stance. These decisions will likely impact the dynamics between major currencies, including the Euro, Japanese Yen, and the U.S. Dollar.

Technical Analysis

The main trend is up, however, momentum is trending lower.

After consolidating for several days, the market is in a weak position, while shifting momentum to the downside.

If the downside momentum continues then we could see the selling pressure extend into 102.208 (S1).

Overcoming 104.205 (R1) will signal a resumption of the uptrend with 105.00 (R2) the next target.

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