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USD holds firm following inflation data

USD - United States Dollar

Currency markets largely ignored yesterday’s Consumer Price Index report, with analysts seeing little within the underlying fundamentals that would force the US Federal Reserve to shift its current view that inflation is transitory. The US Dollar Index was up 0.36% at 90.40 at the time of writing.

Yesterday’s CPI report showed that US inflation has hit 5% on an annualized basis, a rate that far outstrips the central bank's target of 2%. But closer analysis of inputs showed the primary drivers behind the steep increase in prices was an uptick in costs across areas strongly linked with the reopening economy, suggesting price pressures may indeed be transitory. With investors driving treasury yields toward three-month lows and chasing equities to fresh record highs, it appears markets are backing the Fed’s current view and are pricing in long-run accommodative monetary policy.

Key Movers

The European Central Bank kept rates on hold as expected. But Christine Lagarde, the head of the ECB, stated in yesterday’s press conference that the rate of asset purchasing would be stepped up in the next quarter 'at a significantly higher pace'. This move saw the euro lose some ground yesterday and could act as a drag on the currency. EURUSD was down 0.37%, trading at 1.2128 at the time of writing.

Demand for the pound dipped slightly after the UK’s GDP report missed expectations. The UK economy grew by 2.3% in April, the fastest rate of growth since July 2020. This was up from the March reading of 2.1% but missed economists' expectations of 2.5%. It's also looking more likely that the UK could remain with restrictions beyond June 21st, a move that would depress the pound and weigh on it. The extent of the pound's reaction would depend on the length of those restrictions and how far reaching they were. GBPUSD was down 0.30% at 1.4132 at the time of writing.

Expected Ranges

EUR/USD: 1.2113 - 1.2192 ▼

GBP/USD: 1.4116 - 1.4183 ▼

AUD/USD: 0.771 - 0.7773 ▼

USD/CAD: 1.2075 - 1.2135 ▲