The US dollar rally against most currencies that immediately followed the higher-than-expected US April core inflation (3.0% YoY; vs consensus: 2.3%; previous: 1.6%) and headline inflation (4.2% YoY; vs consensus: 3.6%; previous: 2.6%) readings – largely based on the premise that the US Fed would review its highly accommodative policy stance sooner rather than later – proved short-lived as the greenback lost 0.6% to the euro, 0.3% to the British pound, 0.8% to the Swiss franc, and 0.3% to the renminbi since last Thursday’s close. The debate about whether rising inflation is “transitory” – as Fed Chair Jerome Powell described it – and the result of a base effect or the sign of a longer-term, more structural trend is raging and will contribute to the US dollar’s volatility in the months to come. In any case, inflation is only part of the equation and other macroeconomic factors such as US unemployment should be considered. We still support the view of a long-term bearish trend for the USD (see the reasons in our latest quarterly FX commentary). Nonetheless, a faster-than-expected tightening of the Fed’s policy, underpinned by full employment and structural upside pressure on salaries in the US, would temporarily strengthen the US dollar.
April inflation figures will be released tomorrow for both the UK (consensus: 1.4% YoY; vs previous: 0.7%) and Canada (consensus: 3.2% YoY; vs previous: 2.2%), while the final CPI estimate for the Eurozone will also be published (flash estimate: 1.6% YoY; vs previous: 1.3%). Higher-than-expected readings could support the GBP, CAD, and EUR on expectations that central banks tighten their monetary policy faster than originally assumed.
