Hot US inflation data sends shockwaves through the markets

Figures released yesterday, Wednesday, 10th, April, showed that inflation in the US was continuing to climb, despite record-high interest rates. While the 3.5% YoY increase was only slightly higher than market expectations of 3.4%, it’s the steady climb from 3.2% last month that really spooked the markets.

The EUR/USD collapsed dramatically, falling from 1.086 to below 1.075, and the USD Index (DXY) surged to its highest level since November.

The two-year Treasury yield, which moves with interest rate expectations, jumped sharply to 4.97% in late afternoon trade, just off an earlier four-month peak at 4.98%. Stock markets fell, and the S&P 500 closed down almost 1% with roughly nine in every 10 stocks losing ground.

The USD/JPY jumped to a new 34-year high in Thursday trading, reviving market speculation that the Bank of Japan might attempt to intervene.

Futures traders immediately slashed the odds of further rate cuts this year. As recently as January, traders were confident that the Fed would cut rates six times in 2024. Following the inflation data release the odds of a July rate cut fell from 98% to 50%, and a September rate cut is now also in doubt. This leaves November as the only high-probability rate cut this year.

Talking to Bloomberg, former Treasury Secretary Larry Summers raised the spectre of further monetary policy tightening. “You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” he said.

Though the likelihood of an increase in interest rates rather than a decrease is very small, the fact that it is even being discussed shows how concerned policymakers are about persistent inflationary pressure.  

Later today, the European Central Bank will decide on interest rates for the Eurozone, with the market firmly expecting a hold. However, traders will be closely following the ECB president, Christine Lagarde’s press conference following the decision for any clues to future policy direction. Traders are hopeful that the ECB will be able to begin cutting rates in June, though this is still far from a certainty.

Any sign of loosening monetary policy in the EU will put further pressure on the EUR/USD. With rhetoric from US policymakers now surely becoming more hawkish, there seems to be a generous upside for the USD vs. all major currencies in the coming months. 

On the Technical Front

The EUR/USD reached multi-day lows, having registered its largest one-day loss of 2024 following unexpected US interest rate figures. Having pushed well below all three moving averages, particularly the 200-day SMA (purple) support at 1.08306, opened the pair to further short-term losses. However, the price seems to have stalled at the April low of 1.0724 (2 April 2024). The ECB’s announcement later today will likely inform whether the bears will continue to gain ground or whether there will be a rebound (the former looks more likely in the short term).

EUR/USD Daily Chart on TradingView, prepared by Alison Heyerdahl

The next support that the EUR/USD will encounter is the 1.0700 psychological handle of the 2024 low (February 14^th) and below that is the November 2023 low of 1.0516.

Any upside moves could see the Fibonacci 38.2% level at 1.0770 come into focus, with resistance above that at the 1.0800 psychological level and further up at 1.0830 (the 200-day SMA).