CPI Will Help USD Refresh 20-Year High

Summary:

The US April CPI will be announced today. Judging from the sub-item data of the March CPI, the April CPI may be lower than market expectations, and the core CPI inflation may decrease.

BUY USDX

Close Time

CLOSED

103.507

Entry Price

104.227

103.200

98.790 +0.030 +0.03%

47.8

Pips

Profit

103.200

103.985

Exit Price

103.507

Entry Price

104.227

Fundamentals

The USD was volatile yesterday, rising 0.2% and continuing to hover near a 20-year high. Officials Williams, Mester, and Barkin all made it clear that it is appropriate to raise interest rates by 50 basis points in the next two meetings. Although Waller did not make it clear, he also supported this view in his speech. Fed officials including Bostic have all been hawkish since the Fed's policy meeting last week. But what is interesting is that the USD did not rise much because of this. It is mainly due to current market concerns about the Fed's ability to curb inflation while avoiding a recession. This was evident in Williams' speech yesterday, when he said, "the challenge for monetary policy is clear at the moment: keeping inflation down while maintaining a strong economy".

Against this background, it is easy to understand the hawkish attitude shown by Fed officials. That is to dispel people's inflation expectations and prevent artificially high inflation. When people expect inflation to continue to rise, funds will be used to fight inflation, even if product prices may be higher than before. The purpose of the Fed at this stage is very clear, using hawkish speech to dispel inflation expectations, and then using monetary policy to suppress inflation. However, the market is not as expected by the Fed, and according to CME's FedWatch Tool, the market has fully priced in the Fed's expectations for another rate hike of at least 50 basis points at its June meeting. That means unless the Fed officials make a statement indicating "a 75 basis point rate hike as the market previously expected", the remarks of raising interest rates by 50 basis points cannot dispel the existing concerns of the market before the market sees signs of easing inflation.

The US April CPI will be announced today. From the perspective of the March CPI, energy and food prices are still the main factors driving up inflation, which is mainly affected by the Russian-Ukrainian war. The continuation of the Russian-Ukrainian conflict will continue to put pressure on energy prices from the supply side, but fears of economic recession and China's pandemic-related blockade have brought new uncertainty on the demand side. That means food prices will only be higher. That will make April's CPI less than market expectations.

On the bright side, core CPI inflation will be lower. Judging from the sub-items of the core CPI in March, the main factor behind the decrease in the month-on-month growth of the core CPI in March was the fall in the prices of used cars. According to market-leading indicators (Manheim, the largest used car wholesale platform), it is foreseeable that used car inflation will continue to slow in the future. After several waves of fiscal stimulus, the actual disposable income of residents has dropped rapidly and is now below the trend level. That means that the post-pandemic boom in commodity consumption will eventually return to traditional spending on services. Finally, the year-over-year rent growth, another important factor affecting core inflation, appears to have peaked: The Zillow Rent Index (ZORI) year-over-year growth rate fell for the first time since rents soared. The combination of these factors is likely to slow the core CPI inflation quite a bit.

Judging from the market's current attention to US inflation, the April CPI may boost the market's confidence in the Fed's resistance to inflation, thus making the USD soar.

Technical Analysis

In 4 hour chart, USD is still hovering near 20-year highs. The support level is at the top of the channel at 104.227; short-term support is 103.507. This line has formed support for the USD many times since May 7. At the same time, it is also the location of the 100 SMA and 200 SMA in the 1-hour chart, which can be regarded as strong short-term support. In terms of indicators, Stoch and Ichimoku Kinko Hyo show that the USD will fall. But considering that the CPI to be released is more likely to be bullish on the USD, we choose to go long after the fall.

USDX: CPI Will Help USD Refresh 20-Year High _1

Trading Recommendations

Trading direction: Long

Entry price: 103.507

Target price: 104.227

Stop loss: 103.200

Support: 103.507/103.129/102.840

Resistance: 103.865/104.227/104.510

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