Focus on US CPI: Dollar Edges Lower, Treasuries on the Rise

The focus shifts to US CPI data, and the US dollar edges lower. Treasury yields trend higher amid expectations of robust US economic performance. Read more.

Tomorrow, US CPI data is likely to garner much attention, especially after recent, key shorter-term measures of inflation suggest price pressures may be re-accelerating. Shorter-term measures of inflation, such as the month-on-month comparisons, have revealed a stubbornness in getting inflation down to 2%.

Impressive US data has also helped contribute to the lack of progress on the inflation front, with US GDP expected to be 2.5% according to the Atlanta Fed’s GDPNow forecast, and last week’s jobs report revealed a massive surprise of an additional 300k jobs added in March.

However, the overall disinflationary narrative is becoming more challenging to motivate, given the rise in current, shorter-term price data. The Fed has often cited a measure of inflation referred to as ‘super core,’ which comprises services inflation less energy and housing. This measure strips out volatile items like fuel and removes the effect of housing data, which tends to cause massive lag.

For six months now, super core has been rising faster (MoM) than the year-on-year data and is starting to resemble what we saw back in 2022 when prices were rising.

Focus on US CPI: Dollar Edges Lower, Treasuries on the Rise

USD EASES AHEAD OF US INFLATION DATA – BULLISH OUTLOOK STILL CONSTRUCTIVE

The US dollar (via proxy DXY) has declined in April, apart from April Fool’s Day. It’s important to note that the EUR/USD pair dominates most of the US dollar basket, and the recent increase in confidence/sentiment surveys in the EU suggests a positive outlook for the region.

DXY finds support at the 50% Fibonacci retracement of the 2023 decline, with the 50 and 200-day simple moving averages (SMAs) reinforcing that general area. Therefore, should inflation data surprise or remain robust, there is potential for the dollar to rise in the aftermath of the report. This is backed up further by rising US treasury yields (2-year and 10-year). The bullish posture holds as prices trade above the 50 SMA, and the 50 SMA is above the 200 SMA – which suggests a bullish setup.

Resistance appears at 104.70, followed by the swing high of 105.

TREASURY YIELDS TREND HIGHER

US Treasury yields have maintained the longer-term uptrend as robust US data continues to lower expectations of aggressive rate cuts materializing in 2024. Markets have even started entertaining a greater likelihood of that first-rate cut only coming through in July instead of June. In addition, the market is pricing in the possibility of only two cuts this year instead of the Fed’s three, which should support the dollar.

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