Last week, the US April CPI was reported at an annual rate of 8.3%, a slight slowdown from the 8.5% recorded last month. However, the print failed to meet analysts’ expectations of dropping back to 8.1%. The April inflation figures still reflect a high level of inflation in the United States. Current interest rate expectations support the interest rate hike remarks made by the US Federal Reserve Chairman Jerome Powell and other hawkish Fed officials. Therefore, creating concerns that the Fed might execute a rate hike higher than 50 basis points next month, possibly leading to a further expansion of interest rate hikes this year. As more funds flow into the US market, the US dollar index has recently refreshed its 20-year highs. At the same time, the US 10-year Treasury yield remains close to the 3% level.
Following the US inflation announcement, the latest inflation and other consumer market-related data will be released in Europe and the United States. Market participants want to see if there are signs that inflation is peaking. Tomorrow, the markets will focus on the US retail sales data for April, closely related to the country’s overall consumption. The result will affect the dollar trend against other currencies and commodity prices.
The eurozone will also publish the April CPI revision and the ECB Governing Council meeting minutes this week. The minutes of the ECB meeting may mention its plan to end its bond-buying stimulus program at the start of the third quarter before deciding to start raising interest rates. The market is watching whether the ECB will turn hawkish, triggering a flow of funds back to the euro. A relevant stance has supported the euro since last week. However, due to the stabilisation of the US dollar at a 20-year high, the euro is still technically trapped at a low level, falling below the bottom of the two-week range against the US dollar. Therefore, this week we will see whether the ECB minutes are hawkish enough as the pair looks for support at the January 2017 low of 1.0340. The weekly chart could indicate a rebound after forming its double bottom pattern.
The recent continuous weakening of the pound has also attracted investors' attention. On the weekly chart, GBP/USD is in the most extended consecutive decline since August 2019. This week, the United Kingdom released the latest employment data and CPI. The results of these two data sets tend to identify the pulse of the British economy. Many are worried that the lack of growth will be difficult to offset the market's worries about the outlook for the British economy. The current expectation is that the Bank of England may pause rate hikes in the second half of the year, coupled with the fact that the dollar remains strong while the pound is still predominantly weak. Therefore, there is an opportunity to move closer to the 1.2000 mark and look for support from the March 2020 lows.