US relief rally struggles to gain traction despite softer CPI

By Daniela Sabin Hathorn, senior market analyst at Capital.com

Consumer inflation has softened in February. That is the key takeaway from the latest data released on Wednesday. Both headline and core CPI came in lower than expected at 2.8% and 3.1% respectively. Additionally, both monthly readings also dropped from the previous month and came in below expectations at 0.2%.

As anticipated, the initial market reaction was a relief rally in US equities, accompanied by a weaker US dollar and lower yields. However, this momentum has struggled to sustain itself. The dollar and yields have rebounded from their initial knee-jerk declines, turning higher, while equity indices have found limited buying interest to push significantly higher.

Nasdaq 100 1-minute chart

Past performance is not a reliable indicator of future results.

In recent weeks, markets have been pricing in a slowdown in economic growth, fueled by the imposition of tariffs and uncertainty over future trade policies. The weaker performance of certain economic indicators has also dampened sentiment, reinforcing concerns about a possible economic downturn. The reaction following the CPI release suggests that these concerns remain a dominant force in shaping market direction, even as softer inflation data provided a temporary reprieve.

On Tuesday, former President Trump announced an immediate increase in tariffs on Canadian steel and aluminium imports to 50%, further weighing on sentiment. However, he later lifted the tariffs after Ontario withdrew its levy on electricity exports to the US. While this should be viewed as a positive development for the stock market, it also underscores the unpredictability of trade policy. Unlike his first term, where Trump was believed to use the stock market as a gauge of success and often adjusted policies in response to negative market reactions, he now appears less concerned with how markets perceive his decisions. His continued aggressive trade stance has contributed to deepening stock market corrections.

Short-Term Market Outlook

For now, the softer CPI data is helping to alleviate some oversold conditions, albeit marginally. The short-term market bias remains tilted to the downside, with any attempted recovery likely serving as an entry point for sellers.

Meanwhile, the US dollar has shrugged off the softer inflation data, despite the potential for the Federal Reserve to implement multiple rate cuts this year. The recent selloff had pushed the dollar index to a four-month low, reaching a key support level at 103.05, which has thus far held firm.

EUR/USD Faces Resistance

As a result, EUR/USD is back trading below 1.09 on Wednesday as the pair encountered resistance just below 1.0950. The daily chart suggests a possible resistance barrier, which could indicate a reversal. The momentum, however, seems to strongly favour the upside, suggesting this could simply be a technical reset before moving higher once again. In order to confirm, the pair would need to break above 1.0950 over the coming days, possibly moving further towards 1.10. If unable to, the pullback could intensity, pushing EUR/USD back below 1.07.

EUR/USD daily chart

Past performance is not a reliable indicator of future results.