FX.co ★ US inflation significantly affects US dollar

The US inflation has accelerated as expected and reached its 13-year high of 5% on a yearly basis. Core inflation advanced to 3.8% hitting the highest level since 1992. Importantly, on a monthly basis the indicator's reading exceeded the target. It means that the US has faced high inflationary pressure.

At the same time, the US authorities suppose that the situation is not that bad. They are trying to calm down markets. On Thursday, an official representative of Joe Biden's administration repeated once again that the current surge in consumer prices was just a temporary phenomenon. The US authorities' view was also supported by analysts, investors, and businessmen.

Thus, the financial community may convince people that this summer, consumer prices in the US are likely to reach their peak. A slowdown in the price growth is expected in autumn.

"It's most likely that it's going to peak in the next few months. We'll probably see the worst of it this summer, and (then) in the fall, things will probably start to get back to normal," the official said.

The White House official also alleviated Republican lawmakers' concerns that the president's proposal to increase spending on infrastructure, child care, and community colleges would put further pressure on prices. The fact is that the program will begin only in 2023 and will last over a decade.

It is obvious that the US authorities will not change their stance. The inflation data for May will hardly shock the Fed. Investors, who expect that the regulator will change its mind after the consumer price data, are likely to be disappointed. What is more, Jerome Powell will hardly announce his plans about the key interest rate in August.

If the Fed confirms the short-lived nature of the inflation rise, appetite for risky assets may jump. Analysts emphasize that at the moment, it is better to pay attention to the US debt market. An increase in the US bond yield may boost the US dollar. At the same time, on Thursday, investors pushed the yield lower amid beliefs that the current inflationary pressure is a short-lived phenomenon.

In general, the US dollar showed a tepid reaction to the important data unveiled on Thursday. The greenback continued hovering, unable to choose one direction.

Meanwhile, the ECB meeting did bring any surprises. According to some sources, three representatives of the ECB spoke in favor of reducing the PEPP program. They explained such a decision by the improvements in the eurozone economic situation.

Meanwhile, the official data showed that the regulator was likely to continue buying bonds at a higher pace compared to the beginning of the year. It is quite possible that Europe will begin withdrawing its stimulus measures later than the US. This, in turn, may cap the euro's rise against the US dollar. However, some analysts still believe that the euro will gain in value in the near future despite a different pace of recovery.

According to the technical analysis, the euro/dollar pair may rise in the short term. However, the impulse is rather weak. If the pair breaks the level of 1.2200, the bullish sentiment may become stronger.