Crucial breakdown on USD as US inflation trends lower

Disinflation trends for the US are driving the USD lower

• The decline in US inflation continues: The prospect for rate cuts in 2023 is increasing 
• USD breaking down: The USD is weakening again on major forex 
• Equities are pulling higher: The reversal signals on Wall Street are being snuffed out. European indices continue higher whilst US futures are a shade cautious after yesterday’s gains.
• Metals and oil mixed: In commodities, gold and silver are looking to consolidate the break higher, with oil just easing slightly lower.

Falling US inflation boosts sentiment

US inflation trends are tracking decisively lower.

The disinflation that is shown in gauges such as the US CPI and US PPI in addition to Average Hourly Earnings and the Federal Reserve’s preferred inflation measure, the Core PCE means that the Fed’s tightening cycle is increasingly likely to come to an end soon.

The US PPI has been a lead indicator in the reversal lower of consumer inflation gauges (especially the CPI).

The core PPI accelerated lower to 3.4% in March, a two-year low.

Aside from the Core CPI, US inflation gauges are increasingly below the level of US interest rates.

The prospect of rate cuts later in 2023

For some time, the potential for a 25 basis points rate hike in May has been in the balance.

The current probability stands at around 66%.

However, it is increasingly likely that if there is a hike, it will certainly be the final hike of the cycle. Attention will then turn to potential rate cuts.

The recent FOMC minutes talking about the prospect of a recession later in 2023 due to the impact of the US banking crisis plays into this view.

Looking at the CME Group FedWatch tool, the market believes that rate cuts are coming later in 2023.

The chances of rate cuts by December are:

• For 25 basis points of cuts, a probability of 91%
• For 50 basis points of cuts, a probability of 66%

The USD is being sold off

This is driving selling pressure through the USD.

In recent sessions, the Dollar Index has been driven decisively lower and this morning has seen an intraday breakdown below the 100.82 key February low.

There is now key resistance of the overhead supply of all the buyers between 100.82/101.91 that will restrict USD recoveries.

Technical analysis shows key levels being broken

The impact of this USD selling is being felt across major forex pairs.

There have been decisive breakouts on EUR/USD and GBP/USD.

EUR/USD has broken above resistance at 1.1033 

There has been a decisive move above resistance at 1.1033, the key February high.

This means that the pair is trading at a 12-month high.

• This is a key breakout, with a move through the top of a 5-month trading range between 1.0480/1.1033.
• The breakout is also confirmed with the RSI breaking into the high 60s.

With the confirmed breakout, it means that weakness is a chance to buy.

The next important resistance is the March 2022 high of 1.1185.

The c. 100 pip band of breakout support between 1.0930/1.1033 as a medium-term buy-zone, with the support at 1.0830 now a key higher low.

GBP/USD confirming a break above 1.2450 

Cable briefly broke above resistance at 1.2450 a couple of weeks ago, but the move has now been confirmed by price action in recent days.

The break above 1.2525 has rubber-stamped the breakout of a four-month trading range between 1.1800/1.2450.

The breakout comes with the RSI again in the mid-60s to add conviction to the move.

We favour buying into near-term weakness with just over 100 pips of support between 1.2345/1.2450 as a near-term “buy-zone”.

The next important resistance is 1.2666 but then not until 1.2970.

The importance of the higher low at 1.2345 is growing as a higher low.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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