Forex Markets Trade Ahead of US CPI Release

Investors were cautious in forex markets ahead of the release of the US Consumer Price Index (CPI), resulting in modest losses for European equities and the euro. European yields dropped slightly despite European Central Bank (ECB) President Christine Lagarde’s statement that the ECB still has more ground to cover. However, US yields were mixed as the CPI release approached.

The US inflation figures for April came in almost in line with expectations. The data showed a 0.4% increase month-on-month and a 4.9% increase year-on-year for the headline index (down from 5%). The core measure, which excludes volatile energy and housing prices, rose 0.4% month-on-month and 5.5% year-on-year (down from 5.6%). However, Bloomberg’s calculation of a core measure for services showed a slowdown to 0.1% month-on-month and a 5.1% increase year-on-year, indicating less inflationary pressure.

Currently, the markets seem to consider this combination of factors to be weak enough to warrant a Federal Reserve pause. A possible scenario is a 25 basis point reduction in interest rates following the event, which could occur after the summer. US yields have decreased from 7 basis points for the 5-year to 3 basis points for the 30-year.

German yields are experiencing a slight reduction of around 4 basis points across the curve, while core inflation and yields are decreasing, leading to support for equities. As a result, European indices have recovered initial losses, with the EuroStoxx 50 remaining largely unchanged, and the S&P starting 0.8% higher. Brent crude oil attempts to surpass the short-term resistance level of $77.5 per barrel.

Sunset Market Analysis

Unlike recent trends, the forex markets experienced a significant reaction following recent developments. The EUR/USD almost reached its previous correction low of 1.094 before bouncing back to the 1.10 level, presently trading at 1.0985. Meanwhile, the DXY failed to establish a strong bottoming pattern. It is currently hovering around the 101.35 range, with its short-term bottom sitting near 100.8.

The USD/JPY pair experienced a significant drop of a full figure after the release of the CPI. This caused the yen to gain strength and led to the pair currently trading at 134.65. Even the EUR/JPY dropped below the 148 mark, despite equities rebounding intra-day. Sterling, initially, was performing well, given the UK yields ahead of the Bank of England meeting scheduled for tomorrow. The EUR/GBP made an attempt to establish an intra-day bottoming pattern after testing the 0.8675 area.

As anticipated, the National Bank of Poland maintained its policy rate at 6.75% without issuing any immediate communication. The zloty was already performing well before the NBP announcement and gained further momentum following the release of the US CPI data. The zloty is currently trading at the strongest level against the euro since February 2022, at the EUR/PLN 4.52 level.

In conclusion, the forex markets traded cautiously ahead of the US CPI release. Additionally, European equities and the euro incurred some minor losses. While US inflation printed very close to expectations, the easing of core inflation supported equities and forex markets alike. The zloty accelerated post the US CPI release, reaching the strongest level against the euro since February 2022. The Bank of England meeting and further developments in the forex markets will be under the traders’ eye in the coming days.

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