The latest set of US inflation readings released yesterday came in above expectations. The market had been looking for headline month-on-month inflation of 0.5% and core inflation of 0.2%. Both readings, however, were above consensus at 0.6% and 0.3% respectively, marking an increase from the prior month’s 0.4% and 0.1% readings.

Inflation On Firm Upward Trend

With this latest increase, inflation in the US has now risen for four consecutive months. On an annual basis, inflation has now risen 2.6% over the prior month, again surpassing expectations for a 2.5% increase and marking a firm jump on the prior month’s 1.7% reading. Annual inflation is now back up to its highest levels in over two and a half years.

Looking at the breakdown of the data issued by the Labour Department on Tuesday, it is clear that the increase in prices was not just as a result of the upward price action seen in energy markets. The increase in headline data is a solid reflection of the broad-based increase in price pressures seen throughout the economy.

Stimulus Impact

Much of this increase can likely be attributed to the positive impact from the latest round of fiscal stimulus supplied by the US government in March. The $1.9 trillion in stimulus approved by Biden included $400 billion in direct stimulus checks. Alongside the positive impact from this latest stimulus, the wave of optimism created as a result of strong, forward momentum with vaccinations meant that consumer spending was seen rising.

USD Lower Despite Better Data

Despite the better-than-expected data, however, the Dollar has remained fairly subdued this week. Yields have also turned lower as it seems that the report was not strong enough to provide a counterargument to the Fed’s continued insistence that any spike in inflation will be temporary only. Yields soared over Q1 as a result of rising inflation expectations.

However, with the Fed reaffirming its commitment to keeping easing in place across the year, advising that it is not concerned with any temporary inflationary spike, yields have lost some bullish momentum of late. Traders will now be waiting on the US Retail Sales figure due on Thursday which, in light of this release, seems likely to surprise to the upside also.

Technical Views

DXY

The sell-off in the Dollar Index over recent weeks has seen price breaking down through the rising channel from 2021 lows. Price is now moving firmly below the 92.07 level, putting the focus on a test of the 90.98 level next.

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