US Inflation Reshuffles the Deck

The macro point

Let’s pick up the thread. A week ago, the dollar was wavering and the euro was flirting with 1.18. We then mentioned the Powell-Warsh transition as an additional factor weighing on the greenback. But in five sessions, the narrative has reversed. How to explain this?

Two releases tipped the market over. On Tuesday, May 12, US consumer inflation reached 3.8% year-on-year, the highest level since May 2023. On Wednesday, the PPI confirmed: inflation rose in April at its fastest pace since 2022. The much-feared scenario is taking shape: US stagflation.

Direct consequence on money markets: no more Fed rate cuts are anticipated this year, some traders even consider a potential hike by December. The dollar immediately took the lead. The DXY index climbed to 98.6 on Thursday, the highest in two weeks. The confirmation of Kevin Warsh by the Senate on Wednesday reinforced the movement: Warsh inherits a fractured FOMC where hawks (Hammack, Kashkari, Logan) already demand a “neutral stance” rather than promising cuts. With data like last week's, their position becomes de facto majority.

But be careful not to draw hasty conclusions. The Strait of Hormuz remains closed, and it is precisely this blockade that fuels US inflation. Inflationary pressures linked to the energy shock are the direct cause of the current repricing. Yet news from the Gulf remains erratic: attacks on assets in the Emirates and a US strike on Iranian ships in early May briefly pushed Brent to $114. The de-escalation framework of May 6 holds, but it hangs by a thread. Each step towards reopening the strait would push the dollar back 1 to 2% in a few days. And each step back would make it rise again.

The rebound of the dollar is not just a technical surge; it's a structural repricing of the Fed's trajectory. However, to talk about a lasting reversal of the EUR/USD would be premature. Three forces now clash: US stagflation supporting the dollar, the hawkish ECB supporting the euro, and geopolitics that can tip the balance one way or the other depending on developments in Hormuz. Volatility is likely to remain high.

Technical point

The EUR/USD stands around 1.1625 this Monday, a decline of nearly 1.4% over the week. The pair had hit 1.1784 ten days ago, a spectacular round trip. According to us, the 1.15-1.17 zone should limit exchanges this week. A bullish breakout above 1.18 would require a clear de-escalation signal at Hormuz; conversely, a return below 1.15 would imply very hawkish FOMC minutes or a re-acceleration of inflation. It's hard to know which of the two scenarios will prevail.

The Swiss franc remains solid despite the dollar's rebound. The EUR/CHF trades around 0.9150-0.9200. Contrary to what is sometimes mentioned, the franc has not lost its safe-haven status; it has simply exchanged it for that of a structurally strong currency. As long as the Strait of Hormuz remains tense, there's no point betting against the CHF.

The yen continues to act up. The EUR/JPY is around 186. Japanese Prime Minister Sanae Takaichi praised the advantages of a weaker yen in a campaign speech over the weekend, a tone out of sync with her Ministry of Finance which is striving to slow the currency's depreciation. It's precisely this kind of contradiction that prevents the yen from recovering sustainably. The risk of a BoJ intervention is rising.

On the pound's side, the EUR/GBP stabilized around 0.8580-0.8620. The BoE should maintain its rates and British inflation on Wednesday will be closely watched. With inflation expected at +3.4% YoY, the pound remains caught between a paralyzed central bank and a slowing economy.

The supports and resistances displayed below indicate the lows and highs within which prices should evolve during the week.

Announcements to follow

After a busy week, the agenda calms down a bit. Three highlights: the FOMC's April minutes on Wednesday evening, which should confirm the internal opposition of the three hawks. British inflation on Wednesday morning, crucial for the BoE in June. And especially, Thursday, the May flash PMIs for Germany, the eurozone, the UK, and the US: they will provide the first macro read of May, with a particular focus on the price component.

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