The latest US Consumer Price Index (CPI) data for May showed headline inflation rising to 4.2% year-over-year, up from April’s 3.8%, and matching market expectations [2][3]. Core CPI, which excludes food and energy, increased by 2.9% YoY, also in line with forecasts and up from 2.8% previously [2][3]. On a monthly basis, headline CPI rose 0.5%, while core CPI rose 0.2%, slightly below the expected 0.3% [3]. Despite the 'red-hot' inflation print, the US Dollar Index (DXY) fell 0.11% to 99.87, indicating the Greenback was on the back foot after the release [2].
The inflation data reinforced expectations that the Federal Reserve could keep interest rates elevated for longer, with money markets pricing in 22 basis points of tightening by year-end [2][3]. This sentiment weighed on several major currencies. The Australian Dollar (AUD) continued its decline, with the AUD/USD pair trading near 0.7020, as the National Australia Bank (NAB) forecasted that the Reserve Bank of Australia’s next move would likely be a rate cut, though the timing remains uncertain [3]. NAB no longer expects another rate hike, suggesting the current cash rate may be the peak of the tightening cycle [3].
In Canada, the Bank of Canada (BoC) kept its benchmark interest rate unchanged at 2.25% for the fifth consecutive meeting, citing weak economic activity, ongoing US trade policy uncertainty, and elevated oil prices due to Middle East tensions [1]. BoC Governor Tiff Macklem emphasized that any decision on a possible rate hike would depend on evolving conditions, warning that persistent broad inflation from higher energy costs could require consecutive rate hikes [1]. The Canadian Dollar struggled to build on its initial post-decision gains, with USD/CAD trading around 1.3925 after recovering from an intraday low of 1.3899 [1].
Technical analysis across the major pairs reflected a generally bearish bias. GBP/USD traded at 1.3392, with resistance at 1.3408 and 1.3461, and support at 1.3159, while the Relative Strength Index (RSI) suggested sellers retained the upper hand [2]. AUD/USD maintained a bearish near-term bias, trading at 0.7019 and remaining below key moving averages, with immediate support at 0.7018 and resistance at 0.7027 and 0.7045 [3].
Geopolitical tensions in the Middle East, particularly between the US and Iran, contributed to market uncertainty, with reports of military exchanges and stalled diplomatic talks [2]. These tensions, alongside inflation data, influenced both currency movements and central bank outlooks.
CONCLUSION
US inflation data for May met expectations but highlighted persistent price pressures, fueling speculation of further Federal Reserve tightening. This, combined with geopolitical tensions, led to mixed reactions in major currencies and cautious stances from central banks. Market participants remain focused on upcoming economic data and central bank signals for further direction.