The US dollar index crossed the psychologically important resistance level today, reaching the 100th mark. This is almost a two-year maximum. The last time the greenback was at such heights was in the spring of 2020 in the wake of the coronavirus crisis. The hype around the US currency then dragged the EUR/USD pair into the area of 6-7 figures. Today, traders are not far from this price area: the dollar follows the Treasury yields, allowing the bears of the pair to feel quite comfortable.
The demand for the greenback is growing due to several fundamental factors at once. Firstly, key data on the growth of US inflation will be published today. According to preliminary forecasts, the consumer price index will again show record growth, continuing the trends of recent months. So, the total CPI in annual terms should jump to 8.4%. If this indicator really comes out at this level (or higher), then the 40-year record will be updated: the last time the CPI was at such heights was in the early 80s of the last century. The core consumer price index, excluding food and energy prices, should also show positive dynamics (0.5% mom, 6.6% YoY). This year, the most significant increase in prices in the US is observed for gasoline, cars, food and housing.
Today's release will be a logical addition to another inflation report, which reflected a record increase in the Fed's most preferred measure of inflation – the index of personal consumption expenditures. The core PCE index, which does not take into account volatile food and energy prices, jumped to 5.4% (in annual terms). This is the strongest growth rate since June 1983. At the same time, the result of the previous month was revised upwards (from 5.1% to 5.2%). The indicator has been consistently and steadily growing for the past 6 months. For comparison, it can be noted that at the beginning of last year, PCE fluctuated in the range of 1.4%–1.9%, but then it began to gradually gain momentum, especially active over the last six months.
If today's report on the growth of US inflation comes out at least at the level of forecasts, the probability of a 50-point increase in the Fed's rate at the May and June meetings will increase to almost one hundred percent. The corresponding signals were received earlier ("hawkish" minutes of the Fed's March meeting, subsequent comments by Committee members), fueling interest in the dollar. March inflation will be another argument in favor of a more aggressive pace of tightening of the Fed's monetary policy.
Note that despite the fact that the central macroeconomic report of today is the report on inflation growth in the United States, the attention of most traders and experts is now focused on geopolitical events.
Recently, Russia announced Ukraine's rejection of part of the Istanbul proposals, but the negotiation process between the countries is still ongoing at the moment. It is obvious that the negotiations are clearly stalling: the parties are in contact via video, but there is not even an approximate date for the next face-to-face meeting. Representatives of the negotiating groups admit that some points of the future agreement have not yet been agreed upon, so it is very early to talk about the finish line now.
Such a suspended state of affairs worries investors, increasing the level of anti-risk sentiment in the market. Especially against the background of the impending energy crisis in Europe. According to relevant experts, a number of branches of European industry in the field of metallurgy, mechanical engineering, fertilizer production, chemistry, and cement are already experiencing quite great difficulties due to the rise in prices of raw materials and energy carriers. At the same time, a possible refusal of supplies from Russia is likely to lead to a real collapse, which will directly or indirectly affect entire sectors of the EU economy.
The indices of business sentiment published today by the ZEW Institute reflected the pessimistic attitude of European entrepreneurs. The pan–European indicator in April collapsed to -43 points, and the German one to -41 points. The indicators have been in negative territory for the second month in a row.
Thus, the EUR/USD pair retains the potential for its further decline. However, it is advisable to open short positions after overcoming the support level of 1.0850 (the lower line of the Bollinger Bands indicator, on the daily chart). The bears have already come close to this level, but so far they do not dare to storm it. Therefore, in this price area, traders can take a break in anticipation of the next information impulse.
In addition, there is a risk (although extremely unlikely) that today's release will "fall short" of the forecast levels. In this case, the dollar will temporarily retreat. Although, again, this scenario is not basic. In general, the downward trend for the pair is still in force: if the bears push through the 1.0850 mark, then the next price barrier will be the target level of 1.0805 (the annual price minimum).
