The EURUSD dropped more than 40 pips following the release of the highly anticipated CPI data in the U.S. for April, but then the pair was able to recuperate from the initial shock by the end of the hour.
The dollar's initial reaction was to blast off after it was revealed that the annual inflation rate reached 4.2 per cent last month, way above the initial expectations. This performance manifests the rising fears of consumer prices getting out of hand.
The EURUSD developed another descending Wedge pattern, this time from the major resistance level at 1.21700. While this type of pattern typically entails the likely continuation of an existing uptrend, the battle between bears and bulls may yet throw the pair in either direction.
The 50-day MA (in green) and the 100-day MA (in blue) serve as floating resistances. Meanwhile, the 150-day MA (in orange) and the 200-day MA (in purple) take the roles of floating supports.
The price action is likely to test the two boundaries of the Wedge at least one more time each before a decisive breakout/breakdown occurs.
The bullish rebound from 1.20770 immediately after the release of the report signifies the strong buying pressure there. Hence, bears should look for a decisive breakdown below said level to confirm their hopes for a deeper correction.
In contrast, market bulls would likely be eyeing a potential continuation of the rebound towards the major resistance level at 1.21700.
Headline inflation nearly doubled in just a single month, which is owing mainly to the robust demand for energy. This trend follows the underlying rally on the price of crude oil.
The consumer price index surged by 0.8 per cent, which marks the fourth consecutive monthly gain. The recorded performance surpassed the 0.6 per cent growth that was posted in March. It also outstripped completely the preliminary forecasts, which were projecting a much more moderate uptick of only 0.2 per cent.
The sharp jump in consumer prices in April may compel Jerome Powell and his colleagues at the Federal Reserve to recalibrate their policy stance much sooner than initially projected.
While FED's baseline scenario for recovery anticipated a moderate uptick in inflation past the 2.0 target level in April, the huge upsurge is sufficient enough to compel the FOMC to rethink the scope of its asset-purchasing programmes.
The adoption of a more hawkish policy stance as soon as 2021, with the potential hint of lifting the Federal Funds Rate before the end of the year, is sure to affect the greenback in a transformative way.