FX.co ★ A decline in important inflation indicators stimulates markets' optimism

The important US inflation data published last week reassured investors, which led to a resumption of growth in the stock markets and to a weakening of the US dollar.

Last Friday, markets were nervously waiting for the publication of data on the basic price index of personal consumption expenditures (CPI) in the US. The dynamics of the indicator should have confirmed whether the continuation of a strong increase in inflation will support the demand for risky assets with a simultaneous weakening of the US dollar or not.

The indicator was expected to grow to 3.4% in annual terms, but its growth slowed down in monthly terms. Therefore, the index added 0.5% last month against the April value of 0.7% and the forecasted growth by 0.6%.

These data allowed the markets to hope that the prospective slowdown in inflation growth, promised earlier by the Fed, will take place, which means that we should not expect a change in the monetary rate from the US regulator. In view of this, the demand for company shares rose not only in America but also in the world. In turn, the US dollar was under pressure. These market expectations are also supported by the dynamics of the yield of Treasuries, which shows its deceleration.

Apparently, cautious optimism has actually dominated the markets before the publication of production indicators in economically developed countries, consumer inflation in the eurozone, and employment figures in the US this week. Moreover, the American data will be decisive, since they will have to show whether the local labor market is recovering or not. We believe that these figures will give investors a new portion of optimism, or will force them to exercise a high degree of caution again.

Assessing the general mood in the currency markets, we believe that the ADP figures on Wednesday may shock the market before the release of the official values from the US Department of Labor on Friday. If they turn out to be worse than expected – this may serve as a negative signal for investors, indicating that the population with low-paid work continues to prefer to stay at home than to work. Against this background, it will be possible to observe a decline in the US stock indices.

Forecast of the day:

The EUR/USD pair is trading in a very narrow range in anticipation of Europe's inflation data and US employment to be released this week. It is likely that it will remain in the range in the morning, although we continue to expect its promising local growth to 1.2000.

The AUD/USD pair remains in a short-term upward trend. A rise above the level of 0.7600 could lead to further attempts to raise the pair to 0.7650.