US dollar hits near four-week high on inflation data

The news shaping the markets today

Russia’s military forces destroyed a bridge connecting Sievierodonetsk to its twin city Lysychansk, cutting off a possible evacuation passage for civilians. Despite growing geopolitical tensions, WTI crude oil eased this morning.

Japan’s business survey index of large manufacturing firms fell 9.9% in the second quarter, versus a 7.6% decline in the earlier quarter, exerting pressure on the JPY/USD forex pair.

India’s total passenger vehicle sales contracted by 0.2% to 251,052 units in May, following a 10% decline in April. The country recording the second consecutive month of decline sent the INR/USD pair slightly lower in forex trading this morning.

Ireland’s construction PMI declined to a 13-month low level of 51.5 in May, from 52.5 in the previous month. The latest reading signalled the third straight month of contraction in the country’s construction sector and exerted pressure on the EUR/USD forex pair.

New Zealand’s number of visitor arrivals surged by 517% year-over-year to 28,624 in March, with the relaxation of border restrictions. The NZD/USD pair fell slightly in forex trading this morning on US dollar strength.

What’s happening: The US dollar surged on Friday, following the release of data on consumer prices in the country.

What happened: The greenback hit around a four-week high versus a basket of currencies on Friday, after data showed an acceleration in consumer prices for May.

Sentiment for the US dollar improved as inflation levels increased the prospects of the Federal Reserve continuing to hike interest rates through the year.

Why it matters: Data released on Friday showed a surprise increase in US annual inflation to 8.6% in May, reaching the highest level since December 1981, with energy prices climbing 34.6%, the most since September 2005. The figure came in higher than expert projections of 8.3%.

The country’s core inflation rate slowed for a second month to 6% in May, but still came in higher than the consensus estimate of 5.9%.

The Federal Reserve is widely expected to announce a second rate hike of 50 basis points on Wednesday, after having raised rates by 75 basis points since March.

The recent inflation data strengthened prospects of the US Fed continuing with interest rate hikes through September in a bid to cool surging inflation.

The US dollar index, which tracks the greenback’s performance versus six major currencies, gained around 0.9% to reach 104.19 on Friday, its strongest level since May 17. The index is now close to the two-decade high of 105.01 that it had reached in mid-May.

For the week, the US dollar index gained close to 2%, notching its strongest weekly performance in the past six weeks.

With the US inflation data impacting investor risk appetite, the AUD/USD forex pair lost around 0.6% on Friday. The GBP/USD pair shed around 1.4% to reach 1.2315, recording losses for the second straight week following the UK’s gloomy economic projections.

The EUR/USD forex pair also fell around 1% on Friday, with prospects of the ECB ending asset purchases on July 1, which is expected to be followed by a rate increase of 25 bps. The common bloc’s central bank also signalled a higher rate hike in September in case the inflation outlook deteriorates.

What to watch: Traders will keep an eye on the Fed’s interest rate decision, due on Wednesday. The ongoing war between Russia and Ukraine will also remain in focus.

The markets today

Bitcoin will be in focus today after recording losses last week

Context: Bitcoin prices fell below the $26,000 mark, with investors looking to short risky assets.

Details: The cryptocurrency market was unable to hold onto gains made in the prior week. All the top 10 cryptocurrencies declined last week, with the exception of Cardano, which rose around 6%.

Traders shorted Bitcoin last week, sending the largest cryptocurrency to two-week lows as investors looked for safe-haven options. The Wall Street also came under pressure, with the Dow Jones index and S&P 500 shedding 2.73% and 2.91%, respectively, on Friday, after the latest inflation data surprised markets by surging to its highest level since December 1981.

Although inflation data usually has a positive impact on cryptocurrencies, the recently released data strengthened the prospects of the US Federal Reserve hiking interest rates.

While Bitcoin breached the support level of $26,000, Ethereum lost more than 10% last week.

What to watch: Crypto traders will keep an eye on the US Fed’s interest rate decision. Traders will also continue monitoring US equities since the crypto market typically mirrors the US stock market moves.

Other Markets: European trading indices closed lower on Friday, with the FTSE 100, DAX 40, CAC 40 and STOXX Europe 600 down by 2.12%, 3.08%, 2.69% and 2.69%, respectively.

Support & resistances for today

Market snapshot

What else to watch today

UK’s GDP, balance of trade, construction output, industrial production, manufacturing production and goods trade balance, Turkey’s industrial production, retail sales and current account, Spain’s consumer confidence indicator, India’s inflation rate and total vehicle sales, US consumer inflation expectations, South Africa’s SACCI business confidence index, as well as Central Bank of Brazil’s focus market readout.