US inflation Analysis: Final Nail In The Dollar Rally Coffin?

This article originally appeared on FXStreet.

• The US inflation report fell short of expectations with 2.1 percent YoY on Core CPI below 2.2 percent expected.
• The disappointing data joins the weak Non-Farm Payrolls.
• The US Dollar rally may have come to a close, as the economic weakness is not exclusive to the euro-zone and the UK.

The US Core Consumer Price Index rose by only 0.1 percent MoM in April, below 0.2 percent seen in March and expected. Year over year, core inflation remained at 2.1 percent and did not rise to 2.2 percent that was forecast. After this crucial number jumped in March from 1.8 percent to 2.1 percent, some expected inflation to rise quickly and even lift its ugly head.

From outshining to falling back into line

In the month that passed since then, figures from the euro-zone and the UK badly disappointed. Q1 growth was weak, inflation dropped, forward-looking PMI data pointed to a slowdown, and central banks became more cautious, with the BOE postponing its rate hike today.

The US continued enjoying upbeat data, with robust growth, robust PMI data, and the rise in inflation mentioned earlier. The US Dollar gained a lot of ground against its major peers across the Atlantic.

Yet numbers coming out in May were already somewhat different. US ISM PMI figures fell short of expectations at first, and then came the Non-Farm Payrolls report. The economy gained fewer jobs than expected: 164,000 against 192,000 expected. Worse off, Average Hourly Earnings decelerated to 2.6 percent against 2.7 percent previously and forecasted.

And after we learned that wage inflation slowed down, we now know that core inflation that the Fed cares about also stalls. The figure is not terrible, as it remains above 2 percent, but it is not enough to push the Fed's favorite inflation measure, the Core PCE, above 2 percent. It printed 1.9 percent in March.

End of the US Dollar domination?

When two top-tier figures such as wages and inflation slow, the US Dollar could have a serious rethink about its rally. Maybe the Fed will stick to its dot plot of raising rates only three times in 2018. Perhaps they will even push back on the expected rate hike in June, thus cementing three hikes earlier than expected. 

These doubts are already creeping in and pushing the US Dollar down today. But will this sell-off last? The US Dollar may have gone too far in its rally and markets got ahead of themselves. We would have probably seen some profit-taking even without weak data.

The data misses are small, but they are accumulating and coming on top of an extended rally. Perhaps we could see further falls.