US disinflation momentum continues, but more Fed tightening seems likely

By:
on May 11, 2023
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  • Fed tightening to continue despite the disnflationary momentum
  • Both dollar bulls and bears had something to cheer after the CPI report
  • While annualized inflation is trending down, it remains well above the Fed's target

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Another inflation report is behind us, and, as was the case in the past months, it had something for both bulls and bears.

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On the one hand, US dollar bears may argue that the disinflation momentum in the United States continues. After all, here are the annualized inflation prints since June 2022:

  • June 9.06%
  • July 8.52%
  • August 8.26%
  • September 8.2%
  • October 7.75%
  • November 7.11%
  • December 6.45%
  • January 6.41%
  • February 6.04%
  • March 4.98%
  • April 4.93%

The downside momentum is clear, as slowly but surely, inflation is coming down. But there is more to the story than meets the eye.

On the other hand, while CPI inflation was down slightly year-over-year, it remains well above Fed’s target. Moreover, if we consider the fact that the labor market is in good shape, continued Fed tightening seems likely.

How did financial markets react to the April CPI report?

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They reacted with a mixed tone. Initially, the US dollar tanked as stocks surged. As such, EUR/USD climbed back to 1.10, while AUD/USD regained the 0.68 level.

But it was only temporary, as the stock market reversed the gains, triggering a similar move in the FX market.

The only outlier was the USD/JPY currency pair. It was trading in the 135.40 area before the report and quickly dropped 100 pips points on the news. However, while the rest of the major US dollar pairs came back to the levels seen before the report’s release, the USD/JPY did not.

All in all, a mixed report, showing something for everyone. One thing is sure, though. While the Fed may be happy with the disinflationary trend, it is likely to raise rates some more as inflation is still well above the target.

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