11.06.202111:43 Forex Analysis & Reviews: Why did the market strangely react to the strong growth of US inflation?

The latest American consumer inflation data, presented on Thursday, showed the continuation of its growth, which could develop into a more serious problem in the future.

It is worth noting that consumer inflation showed a noticeable increase. In particular, the consumer price index surged from 4.2% to 5.0% in annual terms, while its monthly value in May rose by 0.6% against the forecasted growth of 0.4%. In addition, core consumer inflation rose 3.8% yoy against 3.0%. This indicator added 0.7% in May amid the expected 0.4%.

The reaction of the market to this news is interesting – the US stock indices rose, but the dollar index only slightly moved. Apparently, investors have simply ignored the inflation data and all this happened and continues to happen in view of the declining Treasury yields. Here, the benchmark 10-year government bond yield broke out of a multi-week consolidation period and fell to 1.435%, which is below the local low of May 7. Today, it continues its decline to 1.434%.

What is the reason for the unusual market reaction to the news about the growth of US inflation? Should be the real unrefined inflation be even noticeably higher?

This behavior in the currency markets can only be explained by the continued confidence of investors in the Fed's assessment of the dynamics of inflation, and nothing more. Let's go into details.

Earlier this year, the Federal Reserve, represented by its leader, said that it expects a sharp local inflation growth in the post-pandemic period, but it will stabilize and return to the target level of 2.0% in the second half of this year. It seems that the market still adheres to this forecast and is not afraid of the possibility of the situation getting out of the control of the regulator. That is why we observe a paradoxical situation when government bond purchases began with a simultaneous drop in their yields, and the S&P broad market index updated the previous high on the wave of a strong increase in inflation.

Investors believe that the Fed's scenario will be implemented and the markets still have a significant period of time before the real beginning of the change in the monetary rate, which starts with the process of reducing the purchase of treasuries and will bring significant dividends against the background of the current super-soft monetary policy.

Any other reasons for the continued positive market mood are not observed.

Considering the behavior of the market, we believe that the consolidation of the dollar rate will continue in the near future based on the ICE index.

Forecast of the day:

The EUR/USD pair is trading in a narrow range of 1.2155-1.2200. If it breaks through its upper border amid the rising optimism in the markets, then we should expect its local growth to the level of 1.2260.

The AUD/USD is below the level of 0.7765. An increase above it will allow the pair to further rise first to the level of 0.7795, and then to 0.7815.