On Thursday, the release of strong US industrial inflation data seems to have shocked some of the market participants, who had previously been fully confident that inflation in the United States would gradually decline or at best consolidate around the levels reached earlier.
According to the data presented, the producer price index on an annualized basis increased sharply in March to 2.2% against the expected increase of 1.9% and a revised downward in February's annual value of 1.9%. On a monthly basis, industrial inflation increase sharply in March by 0.6% against expectations of a 0.3% increase and a February value of 0.1%. This sharp increase was due to an increase in energy and food prices in the US.
So what could have caused a noticeable increase in the dollar rate and excitement in the foreign exchange markets on Thursday? It is a sharp increase in industrial inflation, which, if continued, will definitely spur an increase in consumer inflation. In this case, the Fed will be extremely difficult to explain their desire to pause in the further increase in interest rates, which they had made clear earlier.
After the CPI decline to 1.5% in February in annual terms, the market began to say that the Federal Reserve, against external challenges, Brexit, the trade war with China, and the aggravation of trade relations with Europe would not only stop the process of increasing interest rates, but also will move to reduce them. A sharp increase in the indicator to 1.9% close to the target mark of 2.0% makes you wonder if the regulator has not too quickly abandoned its plans for monetary policy. By the way, we note that the last meeting of the American regulator revealed that there are still 6 members against 11 allow for one increase in the key interest rate. And this means that if inflation continues to increase, then the bank will again start talking about the need to increase the cost of borrowing.
There are reasonable questions. So what do you expect from the dollar? Will it grow in this connection or not?
In our opinion, despite the inflation figures , the Fed will take them "on a pencil", but will not do anything, continuing to monitor the situation. It will react only when it all turns into a trend. In the meantime, we expect a period of consolidation of major currency pairs, which is present in the currency markets, where the us dollar is present to continue.
Forecast of the day:
EURUSD continues to trade sideways. It has grown above the level of 1.1285 and can continue to ascend to the level of 1.1325, if it consolidates above this mark.
Meanwhile, the pair AUD/USD found support at 0.7125. If the price holds above it, we should expect the resumption of local growth of the pair to 0.7175 after crossing the level of 0.7140.
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