USD Breaking News: US PPI Joins CPI in Move Lower, Emboldening the Fed

PRODUCER PRICE INDEX (INFLATION) ANALYSIS

• Month-on-month PPI for May prints below consensus estimates
• Lower PPI adds to lower CPI prints earlier this week and increases the possibility of a ‘no hike’ scenario this evening
• EUR/USD and GBP/USD trading higher as both central banks have not signaled a pause in their respective rate hiking cycles

Month on month PPI for May dropped to -0.3% after consensus of a 0.1% drop had initially been forecasted. Year-on-year PPI dropped significantly, from 2.3% to 1.1% while the core measure fell from 3.2% to 2.8%, also beating estimates of 2.9%.

Lower inflation, it would seem, has arrived just in time for the Fed, which appears to favour a no hike scenario ahead of the FOMC statement to be released at 19:00 today. The committee has previously noted that they will take into consideration the prior rate hikes, lag effects and other developments in determining whether further tightening will be appropriate. Additionally, Fed Chairman Jerome Powell has indicated last month that the current level of rates is within ‘restrictive’ territory – a further indication that the Fed believes it has earned the right to slow down on the rate hiking cycle.

IMMEDIATE MARKET RESPONSE: EUR/USD AND GBP/USD

Markets continued to move in the direction of recent momentum, with EUR/USD and GBP/USD heading higher as both the ECB and BoE are set to continue hiking interest rates at a time when the Fed could effectively be on pause.

EUR/USD has been clawing back losses experienced throughout the month of May and the move has continued with increased added intensity after prices at factory gates declined. Lower inflation lends itself to a more constrained terminal rate in the US while the ECB continues to call for hikes with core inflation still elevated.

EUR/USD 5- Min Chart

Likewise, cable has exhibited a similar path but has fared much better than the euro as the declines have not been as severe. The end of May saw cable turn higher and today’s inflation data has lifted the pair to within the zone of resistance around 1.2700 – an immediate test for bullish resolve.

GBP/USD 5-Min Chart