FX.co ★ US Inflation rushes to the euro's aid and breaks the dollar's plans

The markets exhaled sharply on the evening of Wednesday, August 10 and appreciated the long-awaited report on inflation in the United States. However, it brought disappointments to the greenback, as it contributed to the rocket take-off of the euro.

According to the US Bureau of Labor Statistics, July inflation, as measured by the consumer price index (CPI), fell to 8.5% year-on-year. A month earlier, this figure was 9.1%. The current reports disappointed experts, as they were below market expectations of 8.7%.

Last month, inflation in the United States slowed more than experts expected, reflecting a decline in energy prices. According to analysts, the information received may affect the Federal Reserve's current monetary strategy and force it to abandon aggressive interest rate hikes.

At the same time, the basic consumer price index in America, excluding the cost of food and energy, remained unchanged at 5.9%. It should be noted that forecasts provided for its increase to 6.1%. On a monthly basis, core inflation in the US increased by 0.3% after a 0.7% rise in June. According to the estimates of economists surveyed by Bloomberg, the forecast assumes an increase in the overall consumer price index by 0.2% compared to June.

Despite the slowdown in inflation, the cost of living for Americans is still very high. In such a situation, many citizens have debt on loans and cannot increase savings. As a result, they have to spend a lot, and wages often remain the same. At the same time, the level of remuneration is the largest item of expenditure for the service sector.

Against this background, the US currency sank sharply, giving way to the European one. The greenback rolled back to the lowest level immediately after the release of the report on the level of consumer inflation in the United States. At the same time, the EUR/USD pair soared by 1.2% to 1.0336, the highest level since the beginning of July. As a result, the greenback was under strong pressure, and the US dollar index was trading near 105.22.

The current situation has become a gift of fate for the single currency. Of course, the euro took advantage of this chance and immediately overcame two resistance levels, rising to the 50-day moving average. The EUR/USD pair easily reached the 1.0345 mark on the evening of Wednesday, August 10, demonstrating a rapid rise.

Against this background, the yield of US Treasury bonds fell, and stock futures, including contracts for the S&P 500, increased. According to analysts, the current data on US inflation suggest that prices have reached a peak, which is why the central bank may suspend the rapid increase in interest rates.

According to previously published data from the US Bureau of Labor Statistics, in the second quarter of 2022, employment costs per person increased by 10.8% year-on-year. These data reflect the increased rates of wage growth, which were recorded in the report on employment in the non-agricultural sector of the country. It should be noted that the Federal Reserve attaches great importance to this information, since it considers wage growth as a key factor influencing inflation.

After the data that demonstrated steady demand for labor in the United States and steady wage growth, the Fed may reconsider the pace of interest rate hikes. This is facilitated by the current slowdown in inflation. However, it is still problematic for the central bank to return to its 2% target. In such a situation, the central bank will have to rethink the current course of monetary policy. According to economists, fresh reports are unlikely to deter the Fed from its planned actions, thanks to which the interest rate will be in the range of 3%-3.5% at the end of the year.