Dollar Rallies In A Hawkish Reaction To Inflation

The US dollar rallied across the board after the data showed that the US CPI rose in May by 8.6% year-over-year versus 8.3% expected. On a monthly basis, consumer prices came in at 1.0%, also well above the expected rise to 0.7% from 0.3% in the previous month. Furthermore, core measures of inflation came in hotter than forecast.

In response to unexpectedly hot figures, the USD index briefly exceeded the 104.00 mark for the first time since mid-May before retreating marginally. In turn, the euro accelerated losses, notching three-week lows around 1.0520. The data out of the United States reaffirm the idea of aggressive tightening by the Fed, while the ECB is just proceeding to hiking rates, with the first hike in over a decade expected in July. As such, the shared currency continues to stay depressed amid a still wide monetary policy divergence between the two major central banks.

Now that the dollar is back on the offensive after a limited correction witnessed during the second half of last month, the 105.00 figure comes back into the market focus. In the immediate term, the greenback needs to confirm a break of 104.00 on a daily (and weekly) closing basis in order to avoid some profit-taking and thus retarget the 104.25 zone next.

Meanwhile, USDJPY came off intraday lows to regain the 134.00 level as the New York session began. Still, the pair struggles to reenter positive territory as the overbought buck lacks the upside momentum while holding around fresh twenty-year highs seen around 134.50 on Thursday. Despite the extremely overbought conditions, however, the pair is likely to challenge this zone and climb to fresh multi-year highs after some hesitation.