US inflation for the month of April came in much stronger than expected. Both the headline and core CPI exceeded expectations, triggering a sharp selloff in equities and a US dollar rally.
The higher-than-expected inflation rate in the United States triggered a sharp selloff in the equity markets and a rally in the US dollar. Basically, a full risk-off move prompted by the general rise in prices.
The headline and core CPI came out at four three times higher respectively than the market expected. The price of second-hand cars, for example, rose 10% on a month-to-month basis. The Fed expects the phenomena to be transitory, but the question is: what will the next month bring now that the annualised inflation rate already exceeds the previous Fed 2% inflation target.
The US stock market did not like the hot data. As such, the Dow Jones closed the day on its knees, down more than 1,500 points from where it started the trading week three days earlier. The Nasdaq 100 index is well off its highs, now barely holding above 13,000.
The US dollar has had a strong comeback. It has gained across the board, as in a risk-off move, it reigns. Higher inflation should weigh on a currency, but the market participants are now seeing the Fed tapering the asset purchases much sooner than before the inflation data. Also, the dollar is the world’s reserve currency, and if inflation runs hot in the States, it will likely be exported to other parts of the world, so the better alternative for a safe haven remains the world’s reserve currency – the US dollar.
Commodities had an interesting day. Gold, in particular, dropped over $20 on the news, which is surprising giving the fact that gold is a traditional hedge against inflation. Digital assets, such as Bitcoin, followed suit. Oil lost about 1% as well, trading in the vicinity of $65.
Today, the French, German and Swiss banks are closed for a holiday. As such, the liquidity is thinner than on a normal trading day, so the possibility exists that we will see more moves than usual. Other than that, the day is light from an economic calendar point of view, with only the initial jobless claims in the United States able to move the markets.
Markets to Watch
Gold, AUD/USD, EUR/USD – markets in focus today.
Gold appears to have formed a triple top at the $1,840 area. Aggressive bears may want to push it for the measured move, somewhere around the $1,790, although the risk-reward ratio is not that appealing.
One of the biggest drops was seen on the AUD/USD pair. The market here formed a head and shoulders pattern before the inflation release, then falls. The AUD/USD pair was one of the currency pairs that benefited from both higher commodity prices and higher equity prices. Now that the two are reversing, the AUD/USD pair might have more room to the downside.
Another triple top might have formed on the EUR/USD pair. The 1.2170 area proved difficult to crack, and now the path of least resistance seems to be a move toward the pivotal 1.20.
Winners and Losers
The US dollar is the absolute winner in light of the weak inflation data, while the equity markets tanked.