DXY index analysis after hot US CPI data ahead of ECB decision

on Apr 10, 2024
  • The US dollar index surged hard after the strong US inflation numbers.
  • The report means that the Federal Reserve will likely not cut rates soon.
  • The European Central Bank will deliver its interest rate decision on Thursday.

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The US dollar index (DXY) went parabolic after the red-hot US inflation report. It surged to a high of $104.95, its highest swing since April 2nd this year as investors focused on the next actions of the Federal Reserve.

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US dollar index

US dollar index chart

US inflation surged in March

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Consumer prices in the US jumped in March, raising concerns about the next actions of the Federal Reserve. In a report, the Bureau of Labor Statistics (BLS) said that the headline Consumer Price Index (CPI) jumped from 3.2% in February to 3.5% in March. That was a bigger increase than the median estimate of 3.4%.

Core inflation, which excludes the volatile food and energy prices, rose by 3.8% in March, higher than the median estimate of 3.7%. The two figures also rose by 0.4% on a month-on-month basis.

These numbers mean that American inflation is still red hot as the price of services and energy rise. Gasoline prices have jumped to over $3.6 as the price of crude oil has roared back.

Therefore, these numbers mean that the Federal Reserve will have to change its guidance on when rate cuts will start. Before the report, the Fed hinted that it would implement three cuts this year starting in June.

Now, there are signs that the Fed will embrace a wait-and-see approach considering that the US published strong jobs numbers last week. The economy added over 300k jobs in March as the unemployment rate retreated to 3.8%.

ECB interest rate decision ahead

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These inflation numbers mean that the upcoming FOMC minutes will not be all that important since most traders already know what to expect in the coming months.

Therefore, the next important event will come from Frankfurt, where the European Central Bank (ECB) will deliver its interest rate decision.

Economists believe that the ECB will leave interest rates unchanged in this meeting. The bank will then point to a rate cut in the next meeting.

Besides, there are signs that the ECB is nearing its inflation target. The most recent data showed that the bloc’s inflation dropped to 2.4% in March. 

At the same time, while countries like Spain and Italy are booming, bigger ones like Germany and France are going through major headwinds. As such, the bank has the incentive to start cutting interest rates soon. 

The actions of the ECB are important for the US dollar index because the euro is the biggest constituent. 

Therefore, there is a likelihood that the DXY index will continue rising as the divergence between the Fed and ECB continues.

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