- US inflation unexpectedly increased by 3.8% in April.
- US sales increased by 0.5% compared to the previous month’s 1.6% rise.
- The likelihood of a Fed rate hike rose to 35.6%.
Currency futures weakened last week as the dollar soared after upbeat inflation figures. The hotter-than-expected price pressures led to an increase in Fed rate cut expectations. Meanwhile, talks between the US and Iran stalled, leaving market participants uncertain about the future.
The dollar began an epic rally on Tuesday after the US released its CPI report. The annual consumer inflation unexpectedly increased by 3.8% in April. This was a significant jump from the previous month when inflation went up by 3.3%. As a result, the dollar rose and put pressure on other major currencies.
Furthermore, the US released its PPI report on Wednesday, which revealed a surprise 6% annual increase. High prices at the wholesale level will most likely trickle down to the consumer in the coming months. The recent spike in inflation has come due to the ongoing conflict in the Middle East.
The continued closure of the Strait of Hormuz has cut off oil supply, leading to a surge in prices. Most economies are now struggling with low inventories and a spike in the price of goods and services. In the long run, inflation will rise and growth will suffer.
During the week, the US also released its crucial retail sales report, which revealed a decline in consumer spending as expected. Sales increased by 0.5% compared to the previous month’s 1.6% rise. This follows the employment report for April, which also showed weaker job growth than the previous month.
Fed Swaps (Source: Moomoo)
Rising inflation has boosted expectations that the Fed will hike interest rates this year. Before the inflation figures, the likelihood of a rate hike was at around 16%. This figure increased to 35.6% and sent the dollar climbing. However, if growth is also slowing down, the Fed will have the difficult task of balancing it with inflation.
Elsewhere, the UK released its GDP report that showed the economy expanded by 0.3%, briefly supporting the pound. Meanwhile, the Canadian dollar strengthened as the rally in oil boosted the commodity currency.
In the Middle East, the Strait of Hormuz remains closed, and talks between the US and Iran have stalled. Market participants will keep an eye on any developments towards peace or an escalation that will impact oil prices.
