Dollar tumbles on soft inflation, weak retail sales

The EURUSD pair refreshed its monthly high near 1.0870 in Wednesday’s early New York session. The major currency pair strengthened as the U.S. Consumer Price Index eased in line with CPI estimates and the monthly Retail Sales remained stagnant for April.

An expected decline in price pressures in the US economy, along with weak retail sales data, is an unfavorable situation for the US Dollar and bond yields. The DXY Dollar Index, which tracks the greenback’s value against six major currencies, tumbled to a month low around 104.50.

The 10-year US Treasury yields also plunged to 4.36% as weak data is expected to boost expectations for the Federal Reserve to begin reducing interest rates from the September meeting.

This will also improve the confidence of Fed policymakers, who were concerned that the progress in the disinflation process has stalled as the previous three reports were hotter than expected.

Meanwhile, the Euro remains upbeat as investors hope that higher interest rates for longer by the Fed will slow the pace at which the European Central Bank was anticipated to return to policy normalisation.

On Tuesday, ECB policymaker and Banque Nationale de Belgique Governor Pierre Wunsch commented that the first two 25 bps reductions in key ECB rates are close to a “no-brainer”, but added that high rates for longer by the Fed could lead to a slower pace of rate cuts.

Historically, investors underpin the US Dollar against the Euro if the policy divergence between the Fed and the ECB widens. A weak Euro brings significant business to Eurozone merchants from overseas markets.

This could strengthen the economic outlook and result in higher employment and wage growth, which eventually will flare up price pressures again.

On the economic data front, Eurostat has released a second estimate of preliminary Q1 Gross Domestic Product data. The GDP report indicated that quarterly and annualised GDP growth were in line with the consensus and the preliminary reading at 0.3% and 0.4%, respectively.

(Source: OANDA)