The US Consumer Price Index (CPI) is set to reveal another round of rising inflation, driven by persistently high oil prices and the ongoing crisis in the Middle East. This report, due out on Wednesday, is expected to show a monthly CPI increase of 0.5%, following April's 0.6% rise, and an annual reading climbing to 4.2%, its highest level since May 2023. Core CPI figures, which exclude volatile food and energy prices, are forecast to increase by 0.3% and 2.9% on a monthly and yearly basis, respectively.
The conflict in the Middle East has sent crude oil prices soaring by over 50% since February 28. Despite a brief respite in late April when negotiations between the US and Iran halted military activity, the lack of progress in talks and renewed tensions have kept oil prices elevated. Iran's recent missile strikes on Israel in response to Israeli aggression in Lebanon further escalated the situation, marking the first direct exchange of strikes since a temporary ceasefire.
Analysts predict that May's CPI data will provide crucial insights into the impact of high oil prices on consumer inflation. A core CPI reading above 0.3% could fuel concerns about entrenched high inflation, while a print below analysts' forecasts might ease those fears. However, investors remain skeptical of a sustained inflation decline unless the US-Iran crisis ends and oil prices return to pre-war levels.
The Federal Reserve, tasked with maintaining price stability and maximum employment, has been focused on taming inflation. Despite strong labor market data, the Fed is expected to maintain an aggressive stance to control rising price pressures. The latest BLS data showed a 172K rise in Nonfarm Payrolls (NFP) in May, surpassing market expectations.
The CPI report's impact on the EUR/USD pair is also significant. A stronger-than-forecast core CPI print could increase the chances of a September interest rate hike, strengthening the US Dollar. Conversely, a soft core CPI could have the opposite effect, but any negative impact on the USD might be short-lived.
In the context of the EUR/USD pair, technical analysis suggests a bearish tone, with the pair trading below a 20-week Simple Moving Average (SMA). The immediate support level is at 1.1500, with a more relevant one at 1.1470. A clear break below this level could lead to a steeper decline towards 1.1400.
In summary, the upcoming CPI report highlights the ongoing challenges of inflation and the potential impact on monetary policy. The US-Iran crisis and high oil prices remain key factors influencing inflationary trends, with the Federal Reserve's actions and market reactions closely watched by investors and traders alike.
