A key inflation indicator for the US Federal Reserve released earlier today is going to have FOMC members heads spinning at their next meeting in June. The Core PCE Price Index is said to be one of the Fed’s favorite inflation indicators. The April reading YoY was 3.1% vs 2.9% expected. This is the highest reading since the mid-1990s! The Fed has always thought food and energy to be too volatile to be considered when looking at inflation, therefore, they prefer to look at the Core reading. However, we should still note that the headline PCE Price Index was 3.6% vs 3% expected. This data is in-line with other recent April data, which suggests that inflation is growing more rapidly then expected. This has prompted Fed officials recently to comment that they are “talking about talking about tapering bond purchases”.
DXY
The US Dollar was well bid before the data release, either on front running the numbers or ahead of month end flows. Regardless, the data supports the case for a stronger US Dollar. On a daily timeframe, the DXY has been moving lower in a bullish wedge pattern. Price tested support on May 25th at 89.68, however failed to move lower the next day. Yesterday, the US Dollar Index broke through the top downward sloping trendline of the wedge and above recent highs (resistance) at 90.29.
Source: Tradingview, FOREX.com
On a 240-minute chart the recently broken horizontal resistance was also the 38.2% Fibonacci retracement level from the May 5th highs to the May 25th lows. Just above is resistance at the 50% retracement level and the 61.8% Fibonacci retracement level from the same timeframe at 90.48 and 90.71, respectively. Support is back at the top, broken, downward sloping trendline of the wedge near 90.10. Below there, price can fall to the 89.54 lows and then the bottom trendline of the wedge, near 89.25. Note that on the 240-minute timeframe, the RSI has moved into overbought territory, an indication that the DXY may be ready for a pullback.
Source: Tradingview, FOREX.com
EUR/USD
EUR/USD trades opposite the DXY. Notice that today the pair broke below the bottom, upward sloping trendline of a rising wedge and tested horizontal support at 1.2160. It also held the 50% retracement level from the May 5th lows to the May 25th highs. If price breaks below there, the 61.8% Fibonacci retracement level sits at 1.2095. Horizontal support at 1.2050 is just below there. Resistance above is at the bottom, upward sloping trendline of the wedge, near 1.2180 and then the recent highs at 1.2268.
Source: Tradingview, FOREX.com
With the Fed’s favorite gauge of inflation coming in stronger than expected, the Fed is now in the hot seat! Next week, the US will release Non-Farm Payrolls. If the data is strong and April’s data is revised higher, will the Fed move from “talking about talking about tapering” to just “talking about tapering”?
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