The US Consumer Price Index (CPI) report for June is set to reveal a respite from inflation, primarily due to the decline in oil prices following the US-Iran ceasefire. However, this potential relief may be short-lived, as the market's focus shifts to the ongoing tensions and the potential impact of artificial intelligence (AI) on inflation.
A Brief respite from inflation
The June CPI report is expected to show a decline in consumer inflation, with the monthly CPI forecast to fall by 0.1% and the annual reading retreating to 3.8%. This follows the 0.5% increase recorded in May, which marked the highest level since May 2023. The core CPI figures, which exclude volatile food and energy prices, are expected to remain steady at 0.2% and 2.9% on a monthly and yearly basis, respectively.
The decline in oil prices, which dropped by more than 20% in June, has played a significant role in this expected respite from inflation. However, this trend may not be sustainable, as the US and Iran's ceasefire has been fragile, and the two countries have resumed exchanging strikes since the beginning of July. This could revive concerns over the progress in inflation slowing down.
The AI boom and its potential impact
Market participants are increasingly worried about the potential inflationary effect of the AI boom. The massive capital flowing into AI infrastructure, rising industrial electricity costs, and notable price premiums on tech hardware and LLM software subscriptions could keep core services and goods inflation elevated and put pressure on consumers.
The Federal Reserve (Fed) has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future. According to the CME FedWatch Tool, markets currently see about a 30% probability of a 25 basis points (bps) interest rate hike in July and price in around a 77% chance that the US central bank will raise rates at least once by the end of the year.
The EUR/USD outlook
The US Consumer Price Index report could affect the EUR/USD pair. If the monthly CPI surprises to the upside and posts a positive reading, investors could reassess the odds of a July rate hike, boosting the US Dollar and putting renewed bearish pressure on EUR/USD. Conversely, a bigger decline in the monthly CPI could help EUR/USD gain traction, but investors are unlikely to overreact to a single soft CPI print.
Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for EUR/USD. The pair has stabilized slightly above 1.1400 since touching a fresh 12-month low below 1.1330 in late June. However, the Relative Strength Index (RSI) indicator on the daily chart is yet to climb above 50, and the pair is yet to flip the 20-day Simple Moving Average (SMA) into support, reflecting buyers' hesitancy.
Conclusion
In conclusion, the June CPI report is expected to show a decline in consumer inflation, primarily due to the decline in oil prices. However, this potential relief may be short-lived, as the market's focus shifts to the ongoing tensions and the potential impact of AI on inflation. The Fed's aggressive stance and the market's concerns about the AI boom could keep inflation elevated, putting pressure on consumers and potentially impacting the EUR/USD pair.
