The annual consumer price index (CPI) rose to 8.5% in March against 7.9% in February, the highest value in 41 years, the US Department of Labor said on Tuesday. The CPI, as the data show, rose at the fastest rate since December 1981, also remaining above 6% for the sixth straight month. This value is four times higher than the Fed's target.
On a monthly basis, CPI grew by 1.2% (from 0.8% in February), which was a record acceleration since September 2005. The steadily accelerating inflation in the United States, according to economists, is facilitated by the rapid increase in energy and food prices, as well as supply problems and strong consumer demand.
The dollar declined after the publication of inflation figures for the United States, because market participants felt that the Fed could not cope with such a strong acceleration of inflation.
Nevertheless, later on, the dollar again turned to growth, and futures for the dollar index (DXY) closed on Tuesday at 100.29. Today, the dollar is strengthening again, and DXY reached a new 23-month high of 100.55 during the Asian trading session.
Most likely, the March inflation report will not change the Fed's plans for a more rapid tightening of policy. Richmond Fed President Thomas Barkin said on Tuesday that the central bank could face more sustained inflationary pressures. "There are a few reasons to think we may face more headwinds when it comes to containing inflation going forward," said Barkin. However, it could also mean, in his opinion, that interest rates will be higher than in recent years.
Thus, yesterday's decline in the dollar provided an additional opportunity for its buyers to build up long positions. Investors continue to believe that the Federal Reserve will raise rates more aggressively, also given the data released on Tuesday.
Of the significant events of today's trading day, it is worth noting the RBNZ meeting, which ended at 02:00 (GMT) with the publication of a decision on the interest rate. It was raised immediately by 0.50% to 1.5%. "A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment," the central bank said in a statement.
However, despite the increase in interest rates, the New Zealand currency fell sharply. The leaders of the RBNZ, by their decision, are trying to prevent a rapid rise in prices for consumer goods. But it also risks a sharp slowdown in the economy, which is already facing headwinds, including weak business and consumer confidence, China's quarantine policy, and the situation in Ukraine.
Now the attention of market participants switches to tomorrow's meeting of the ECB. Market participants do not expect decisive action from the ECB to curb rising inflation.
The European Central Bank may signal that it will curtail stimulus at a faster pace, for example, by naming the end of June as the date for curtailing asset purchases. Bank executives may also signal that interest rates will rise soon after asset purchases are completed. Market participants take into account two ECB interest rate increases of 0.25% this year. But even with such an increase, the ECB's policy will still be considered soft: the ECB's deposit rate at the moment is -0.50%, and the main interest rate is 0%.
Soaring energy prices that have increased inflationary pressures, weakening consumer confidence, and negative real wage growth in the Eurozone make the ECB's task of finding a balance between stimulating weakened economic activity and containing inflationary pressures much more difficult. As the head of the European Central Bank, Christine Lagarde, recently stated, "the longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios."
Thus, given the prospect of increasing divergence in the curves reflecting the monetary policy of the Fed and the ECB, we should expect a further decline in EUR/USD (with immediate targets at the levels of 1.0765 and 1.0700.
The ECB's decision on the rate will be published on Thursday at 11:45 GMT, and the ECB meeting will begin at 12:30, and it is likely to be of the greatest interest to market participants.
Today, volatility will rise again at 12:30 GMT on the release of the US producer price indices for March, as well as at 14:00 and 15:15, when the Bank of Canada interest rate decision will be published and its press conference will begin.
