The US Dollar was knocked lower yesterday as the latest domestic inflation picture highlighted ongoing weakness. Despite inflation rising on a monthly basis in February, the annual picture remains muted for the first time in four months.

Headline CPI printed just 1.5% in February, down from 1.6% over the prior month. It was also below expectations of a 1.6% reading. Core CPI, which strips out food and energy costs, was weak as well at 2.1% vs. 2.2% prior and expected.

Upward Wages Failing To Stoke Inflation

The reading is disappointing in light of the recent labor market report. The report showed wage costs rising to their highest level of the cycle at 3.4%, up from 3.1% prior.

Considering these readings together, the implication is that the pass-through from upward wage movement has been very limited thus far. Increased productivity over recent months has allowed companies to absorb higher wage costs via broader profit margins. This means that costs are not passed through to the consumer.

Technical Perspective

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The USD Index continues to put pressure on the 97.73 level, while within the bullish channel from 2017 lows. A break higher here will put the focus on a test of the next structural resistance level around 100.35. There, we have major swing highs of 2014, 2015 and 2016, ahead of the channel top. This level could prove to be the right shoulder of a large head and shoulders pattern in the Dollar Index, suggesting the potential for a large bearish reversal in the coming years.