US Inflation YoY Declines to 2-Year Lows but Core CPI Remains Sticky, DXY Edges Lower

Key points of the US Consumer Price Index:

US headline inflation fell yoy in May to 4% beating estimates around 4.1% while core yoy CPI remained fairly flat in line with estimates at 5.3%. The headline inflation reading on an annual basis is the lowest since March 2021 and caps 12 consecutive months of declines. Core CPI which excludes volatile items such as food and energy reached its lowest level since November 2021 but remains fairly flat.

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The biggest contributors to the decline in the headline figure came from the energy index, which fell 3.6 percent in May as the main energy component indices declined. Food prices as noted above continue to be a real concern for the Fed as the food away from home index is up 8.3% over the past year and well above the level you would feel the Fed is comfortable with.

Source: US Bureau of Labor Statistics

The FOMC meeting is tomorrow and the outlook is moving forward

As tomorrow’s meeting approaches, market prices continue to tend to pause as today’s data is likely to reinforce such a situation. Core inflation remains flat, but these may be the Fed’s first signs that the fight against inflation may be on the right track.

If this is the case, then the guidance from the Fed could be pivotal going forward as market participants already see a greater likelihood of a rate hike at the July meeting. This came in the immediate aftermath of the meeting with the odds of a rate hike rising by 65% ​​from the 25 basis point hike in July. Of course, today’s data is positive for the Fed in its fight against inflation, whether or not that affects tomorrow’s meeting, and the policy outlook remains moving forward.

Market reaction

DXY daily chart

Source: TradingView, prepared by Zain Fouda

DXY was caught between the 103.30 and 104.30 handles as it was looking for a new catalyst to inspire the breakout. Looking at the dollar index on the daily time frame, we can see the major resistance area around 104.30 which has been holding its strength lately. The price has moved up on several occasions, but the close of the daily candlestick above has not been achieved so far.

Alternatively, a break below the 50- and 100-day EMA could lead to a rapid slide towards the 50-day EMA and possibly lower. For now though, DXY is still in an overall uptrend without a daily candle closing below the 101.00 handle.

Key levels during the day worth watching:

support areas

• 103.00 (100-day moving average)
• 102.50 (50-day moving average)
• 101.50

areas of resistance

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @tweet