Euro Unfazed By US CPI And ECB Steadiness

There were no fireworks for the U.S. dollar today despite the biggest jump in U.S. inflation since August 2008. Normally, the greenback would spike on a sharp rise in consumer prices but it ended the day lower against most major currencies. A hot CPI report was widely anticipated but also consistently downplayed by Federal Reserve officials. Still, the Fed meets next week and today’s report escalates the growing concern about the central bank’s complacency and the danger that inflation will not fall as readily as they anticipate.

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While the 5% year-over-year increase in prices will force the Fed to upgrade their inflation projections in this quarter’s economic forecasts, they are taking a data rather than forecast-driven approach. In other words, the central bank wants to see evidence of uncontrollable inflation before adjusting policy. Expiring enhanced unemployment benefits is one of the main reasons why the Fed wants to wait. Their concern is that wage pressures will ease as more workers return to the workforce. USD/JPY jumped to 109.80 on the back of CPI but turned lower by the end of the NY session. The University of Michigan Consumer Sentiment Index is due for release tomorrow – further improvements are expected.

The European Central Bank’s monetary policy announcement disappointed euro traders who were hoping for more. The ECB upgraded their inflation and growth projections for 2021 and 2022 but avoided any talk of taper. Like the Fed, ECB President Lagarde sees the increase in inflation as transitory and feels that underlying inflation remains subdued. Prices could rise further in the second half of the year but should decline as “temporary factors fade out.” For these reasons, they expect headline inflation to remain below their “aim over the projection horizon.” Lagarde also didn’t sound overly excited about the economic boost from re-openings as she pointed to little movement in the labor market and described overall risks as broadly balanced. The main takeaway from ECB is that accommodation is here to stay and like the Fed, they want to be data rather than forecast driven. Euro traded lower against all of the major currencies on the back of the ECB meeting.

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