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EURUSD soars after the dollar gets slammed after higher inflation data

Market Brief

The EURUSD is ripping higher towards 1.1500 after the breakout from the 6 weeklong consolidation period. The break higher is significant and I am expecting a retest of the old descending trend line as there is a market structure above that is likely to act as resistance. This move is based on what happened to the US dollar, but investors are awaiting the ECB's new economic bulletin and remarks from Luis De Guindos, which may contain indications on the possible future course of monetary policy for the ECB. There are a few scheduled speeches today from De Guindos and other ECB members so we could be in for some euro volatility today.

The EURUSD sentiment indicator shows an extreme number of traders on the ActivTrader platform trying to short the single currency, so I see this as a bullish continuation going forwards, or at least until they get stopped out or flip to being long.

US inflation as measured by the CPI is at a multi-decade high and at 7.0%, though the pace of increase is slowing. In fact, the Service Sector portion of inflation is declining, so we could be at peak inflation or nearing it.

Monetary inflation is bad for a currency and the currency traders are now willing to remove their bids from the US dollar or take profits after the 6-month bull run.

The above chart is indicating that the greenback is now decoupling from the rising yields, but this could change today after the US 30-year Bond auction. Yesterday’s 10-year Notes auction didn’t have as much interest as expected and that may mean a lot of the repricing for the coming rate hikes has been baked in for now.

Looking at the forex heatmap the shift is towards the commodity pairs and out of the yen and Swiss franc. If this continues throughout the day, we could see commodity prices, as well as equities, rise. Before the US session opens, we get the latest Producer Price Index from the USA which is forecast to show a slowing of price increases from the previous months.

The GBPUSD currency pair is continuing to break higher, despite calls for Boris Johnson to resign as prime minister after he admitted attending a drinks party during the lockdown. "I understand the public's "rage" over the Downing Street Garden Party in 2020, said the PM as he apologized for the way he handled the event. So far, the pound is suggesting Boris will get through this phase. However, a change at the top could lead to market uncertainty.

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