Red Hot U.S. Inflation Spurs Massive Dollar Gains

Red Hot U.S. Inflation Spurs Massive Dollar Gains

The US Dollar has been on a tear since last Wednesday when Consumer Price Indexes showed that inflation in the U.S. climbed to its highest level in 30 years. The CPI surged 6.2% from a yearly perspective (0.9% month over month), bringing inflation to levels last seen in December 1990, while the Core CPI increased 4.6% compared to last October, making it the biggest gain since August 1991.

The US Dollar Index (DXY) rose to a 16-month high before taking a small breather, while EUR/USD dropped below 1.1500 support, reaching a low of 1.1433 at press time. A big part of the drop is attributed to surging U.S. inflation and on top of that, the Euro is still affected by the belief that the European Central Bank will lag behind its major counterparts such as the Fed and the Bank of England in terms of rate hikes.

Key Events for the Week Ahead

Monday is a slow day, with the only notable release being the Empire State Manufacturing Index that is scheduled for release at 1:30 pm GMT. This is a survey of manufacturers from the New York area and acts as a leading indicator of economic health; however, its impact tends to be low-to-medium especially if the actual number comes close to the forecast of 22.1.

The main event of the week will be the release of the U.S. Retail Sales and Core Retail Sales numbers, scheduled for Tuesday at 1:30 pm GMT. The Core version excludes automobiles from the calculation and is considered a smoother gauge of consumer spending trends. Sales made at retail levels account for the biggest part of the overall economic activity, hence the increased importance of these indicators. The Core version is expected to show a change of 1.0% from last month’s 0.8%, while the vanilla version is expected to show a 1.2% change; numbers above expectations usually strengthen the greenback.

The rest of the week will be sprinkled with speeches delivered by Fed members and the head of the ECB, Christine Lagarde. These are considered medium-importance events but as always, any clues regarding a shift in monetary policy can have a stronger effect on the currency’s movement.

Technical Outlook – EUR/USD

The pair is currently trading very close to the long-term S/R level at 1.1430, after a successful break of 1.1500 support. Given the latest strength exhibited by the US Dollar, the current impulse is likely to take the pair into the lower border of the diagonal channel seen on the chart below, especially if the ECB doesn’t change its stance regarding rate hikes.

The MACD is showing bearish momentum (moving down, with lines spread apart) and the RSI is not oversold, which shows that the greenback is likely to remain in control for a while. The first barrier is the S/R zone between 1.1430 – 1.1400 and a break would likely bring in additional sellers. Potential resistance is located at 1.1500 but as long as that level remains intact, the bias is bearish.