Federal Reserve policy and Inflation
The US Consumer Price Index (CPI), which is officially the measure of US inflation, rose 5% (YY) in May from 4,2% in April. The CPI edged lower to 0.6% from 0.8% monthly but beat analysts' estimate of 0.4%. The Core CPI, which excludes food and energy prices, climbed to 3.8% annually from 3% in April.
Payroll numbers in April and May were disappointing, while the country witnessed a growth rate of 6,4% in the first quarter. It means that despite many created job opportunities, many people either could not find a job to fit in or, as many believe, are not motivated enough to go after a job, while Biden administration extending unemployment insurance through September. This policy is dissuading many workers from looking for a job.
On the other hand, giving the remarkable growth in the first quarter, as well as many indexes like PMI (Both manufacturing and Service sector) and Retail Sales, as well as average earnings growth (0.5% YY), helped the treasury rates to rise sharply in the first quarter.
Despite the repeated emphasis of FOMC members that they are committed to holding the current policy and interest rates as long as the economy need and the labor market gets back to its full recovery, minutes from the FED April meeting mentioned that some of the members supporting the idea of tapering, and discussed that bond purchasing program could be eased.
Looking at the published data tells us that there are two kinds of data that, in appearance, they contradict each other. Labor market data that says still there ate more than 7 million unemployed American out there, and we have to read it as an opposing point of recovery path, so FED must keep its ultra-dovish policies and excellent GDP and PMI number growth, telling us that inflation risk is much closer than what we used to think.
While these published numbers have Apparent Contradiction, seeking deeper tells us that all of them somehow confirm that the economy is getting back its health, and markets must worry about the current situation. FED, on average trying to keep Inflation beyond the 2% target. Now FED by accepting the higher Inflation at the moment and even says that it can go higher, but at the same time, they believe that it will be short-lived and market supply and demand will reach equilibrium soon.
Concerning the FED members' comment, I believe that Inflation is the real risk, and if it becomes more widespread and keeps continuing, FED will need a quick response.
USD index Technical review
Technical indicators can not fully support the uptrend and mostly about side movement; however, DXY creates a higher lowe, RSI at 47, while price moves tangentially with the OBV trend line. The general idea is positive. Especially if the US dollar index can breathe above 90.25 area to enter the next zone between 90.25 and 90.60, then technical indicators will be supporting the bulls. Any close above 90.60 will open the doors for higher numbers. On the flip side, breaching under first support at 89.90 can change the market attitude.