Core PCE still strong, but weaker than March

Considered to be the Fed’s favorite measure of inflation, the Core PCE for April was 4.9% YoY vs an expectation of 4.9% YoY and a reading of 5.2% YoY in March.  This is the first drop in the index in 17 months.  Although one reading isn’t considered a trend, looking at in context with other inflation readings, it may be suggesting that inflation has plateaued.  The headline PCE reading was 6.3% YoY vs an expectation of 6.4% YoY and a March reading of 6.6% YoY.  Recall that the April CPI reading was 8.3% YoY for April vs 8.5% YoY in March, while the Core CPI for April was 6.2% in April vs 6.5% in March.  The softer inflation data has led to decreased expectations of aggressive Fed rate hikes and helped the US Dollar Index to sell off.

What is inflation?

The US Dollar Index had been rallying in an upward sloping channel since May 2021.  The DXY broke above the top of the channel on April 5^th and continued moving higher, taking out the highs of January 2017 on May 6^th and making its way to a recent high of 105.00 on May 8^th.  Since then, price has been pulling back and is nearing support on the daily timeframe at 101.03.

Source: Tradingview, Stone X

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On a 240-minute timeframe, DXY has pulled back to the just above the 50% retracement level from the lows of March 31^st to the highs of May 8^th, near 101.34.  Below there is horizontal support from the highs of April 19^th at 101.03, then a confluence of support at the top, upward sloping trendline of the long-term channel and the 61.8% Fibonacci retracement level from the same timeframe near 100.50.  First resistance is at the May 5^th low near 102.35 and then again at the May 18^th low of 103.19.  Above there, price can move back up to the May 8^th highs of 105.00.

Source: Tradingview, Stone X

EUR/USD makes up 57% if the US Dollar Index.  Therefore, it makes sense that the DXY and EUR/USD would move in opposite directions a majority of the time.  EUR/USD made a near term low on May 13^th at 1.0348, holding support from the 2017 lows at 1.0340.  The pair then bounced to horizontal resistance and the 50% retracement level from the March 31^st highs to the May 13^th lows near 1.0757/1.0767.  If price continues higher, the next level of resistance is at the 61.8% Fibonacci retracement level from the same timeframe near 1.0865.  Above there, price can move to horizontal resistance at 1.0945 and then the highs of March 31^st at 1.1185.

Source: Tradingview, Stone X

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However, notice that EUR/USD is diverging with the RSI on the 240-minute timeframe, an indication that price may be ready for a pullback.  First support is at the May 19^th highs of 1.0607 and then horizontal support near 1.0507.  Below there, EUR/USD can fall to the lows of May 13^th near 1.0348.

The Core PCE Index, said to be one of the Fed’s favorite measures of inflation for April came in weaker than the reading in March.  Does this mean that inflation is plateauing?  Markets have been taking the view that the “softer than prior months” inflation readings are a sign that the Fed may slow its aggressive rate hikes come September.  As a result, the DXY has dipped and EUR/USD has gone bid.

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