11.05.202304:30 Forex Analysis & Reviews: US inflation drops to 4.9%

The US inflation report is the first report this week that markets have truly been waiting for. However, expectations for the value of this indicator were initially moderate. Forecasts suggested that inflation in April would be in the range of 4.9-5.0% YoY. The report showed that it slowed down from 5% to 4.9% YoY, in line with predictions. Demand for the US currency momentarily decreased, but I believe that the decline of the US currency will be short-lived because inflation has barely changed. However, it is worth noting that the euro and especially the pound may use this report as a reason for growth.

The pound has been rising almost every day in recent weeks, which has not always corresponded to the news background. From this, I can conclude that the market does not need much to buy the pound now. Meanwhile, the euro is trading sideways. So, what does a 0.1% slowdown in inflation mean? I think that the Federal Reserve's policy will not change due to this report. The next meeting will take place in 5 weeks, during which time another report (for May) will be released, allowing for a comprehensive picture to be formed. If inflation slows down very slowly for several consecutive months (as in April), the FOMC may decide on another interest rate hike. However, I do not think that the US currency will benefit from this. Over the last 8-9 months, demand for the US currency has been constantly decreasing, even though interest rates are rising not only for the European Central Bank and the Bank of England but also for the Fed.

Based on everything mentioned above, the market sentiment is currently very strong and stable. A slight slowdown in inflation slightly increases the likelihood of another tightening in 2023, which should have raised demand for the dollar. However, we have seen its decline again, which means the market is currently not interested in buying dollars. If this is indeed the case, the dollar may continue to decline in any news environment.

I will also note that the core inflation indicator has slowed to 5.5%, losing 0.1%, just like overall inflation. If the market reacted to the decline in demand for the dollar based on the core indicator, it is even stranger since it is currently even higher than the overall inflation. In any case, the changes in April were so insignificant that the reaction should not be strong. Consequently, the market is simply looking for a reason to start getting rid of the US currency again. The wave markup may become even more complicated, as the pound may continue to build an ascending wave, and the euro may experience horizontal movement.

Based on the analysis conducted, I conclude that the construction of the uptrend section is nearing completion or has already been completed. Therefore, it is now advisable to sell, and the instrument has a fairly large scope for decline. I think the targets in the range of 1.0500-1.0600 can be considered quite realistic. With these goals, I recommend selling the instrument on the MACD indicator's downward reversals as long as the instrument remains below the 1.1030 level, which corresponds to 0.0% Fibonacci.

The wave pattern of the GBP/USD pair has long implied the construction of a new descending wave. The wave markup is currently not entirely unambiguous, just like the news background. I do not see factors that would support the pound in the long term, and wave b could turn out to be very deep, but it has not even started yet. I believe that a decline in the instrument is more likely at the moment, but the first wave of the ascending segment continues to become more complex. The unsuccessful attempt to break through the 1.2615 level, which corresponds to 127.2% Fibonacci, indicates the market's readiness to sell.