US CPI: No inflation could mean bad news for US Dollar

Markets may see a lower US Dollar, which could mean a higher EUR/USD.


US inflation was released earlier, and it wasn’t good.  Although headline inflation was in line with expectations for January (MoM) at 0.3%, it was core inflation which set the tone for the markets.  Core inflation for January (MoM) was 0% vs and expectation of 0.2%!  Core inflation strips out the often-volatile components of the headline number, which are food and energy prices.  As a result, the January annualized inflation remained unchanged from December’s number at 1.4%, while the annualized headline inflation component down ticked from 1.6% to 1.4%!

Just as inflation expectations were starting to creep up in the markets, along with the US Dollar, the positive news of the  $1.9 trillion stimulus package making its way through Congress and todays lower inflation data should bring concern to US Dollar bulls.  While prices of commodities such as Crude Oil, Iron Ore, and Copper, have been rising, it is not feeding through to the overall market.  Therefore, inflation remains low.  As a result, markets may now be anticipating longer accommodative monetary policy, which means higher stock markets, lower bond prices, and a lower US Dollar.

The main beneficiary from a lower US Dollar is the EUR/USD.  The Euro currently makes up 57% of the US Dollar Index (DXY).  On a 240-minute timeframe, EUR/USD has been moving higher since Friday’s lows after payrolls at 1.1952.  Price then formed an inverted head and shoulders pattern and reached the target near 1.2130 earlier today.  In addition, price is nearing overbought conditions on the RSI, indication a pause or pullback in price may be near. Bears will be looking to sell near the 50% retracement level of the move from the January 6th highs to Fridays lows near 1.2150.  Horizontal resistance and the 61.8% Fibonacci retracement level from the previously mentioned timeframe crosses between 1.2188 and 1.2197.  Above there, horizontal resistance is at 1.2222.   However, EUR/USD bulls (and therefore, US Dollar bears) will be looking to by on dips if they believe weaker inflation is still in play.   Neckline support crosses at 1.2050.  Below there is the 1.20000 psychological support level and then Fridays lows at 1.1952.

Source: Tradingview,

With the recent inflation data and the $1.9 trillion stimulus package, both fiscal and monetary stimulus may be at the forefront of trader’s minds.  As a result, markets may see a lower US Dollar, which could mean a higher EUR/USD.

Learn more about forex trading opportunities.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account