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14.05.2025 01:14 AM
Inflation Does the Dollar a Bearish Disservice
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One of the few indicators the market occasionally pays attention to is U.S. inflation. After Donald Trump introduced trade tariffs, economists immediately started discussing rising inflation. This conclusion is logical, as tariffs imply increased prices in the U.S. and abroad. In essence, tariffs are a government tax on imported goods. In any transaction between the initial producer and the final consumer, the government is involved, taking "its share." Therefore, a rise in consumer prices is nearly inevitable.

It should also be noted that over the past month, tariffs for all countries originally targeted by Trump have significantly decreased. For all countries except China, the rates are currently at 10%. However, for China, the rate is 30%. However, these import tariff rates are only in effect for three months, during which time the U.S. president has scheduled trade negotiations. If no agreements are reached within 90 days, tariffs will return to their original levels.

Still, this three-month pause is a positive step, at least for the U.S. economy, which contracted by 0.3% quarter-on-quarter in Q1. Inflation, on the other hand, has yet to respond to the tariffs. As of April, the U.S. Consumer Price Index (CPI) dropped from 2.4% to 2.3% year-over-year. Core inflation held steady at 2.8%. This might be the best-case scenario, but as Jerome Powell has repeatedly said, it's too early to draw conclusions.

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The full impact of Trump's tariffs had not yet been felt by April. The Chair of the Federal Reserve clarified that the central bank does not intend to lower interest rates at this time, as it anticipates the effects of the new trade policy will not be noticeable until at least the summer. As we can see, the economy reacted almost immediately, while inflation did not. Therefore, the drop in inflation in April is encouraging, but it doesn't rule out a sharp increase in May or June. For the U.S. dollar, a decline in inflation is considered unfavorable, as it brings the Fed closer to the next round of monetary easing.

Wave Structure for EUR/USD:

Based on the analysis of EUR/USD, I conclude that the pair continues to form an upward trend segment. In the near future, the wave structure will entirely depend on the stance and actions of the U.S. president. This should be constantly kept in mind. The formation of wave 3 of the upward trend segment has begun, and its targets could stretch to the 1.2500 area. Achieving them will depend solely on Trump's policies. At the moment, wave 2 within 3 appears close to completion. Therefore, I consider long positions with targets above 1.1572 (corresponding to the 423.6% Fibonacci level). However, Trump can easily reverse the bullish trend downward.

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Wave Structure for GBP/USD:

The wave structure of GBP/USD has transformed. We are now dealing with a bullish, impulsive trend segment. Unfortunately, under Donald Trump, markets may still face a host of shocks and reversals that defy any wave structure or form of technical analysis. The formation of upward wave 3 continues, with near-term targets at 1.3541 and 1.3714. Therefore, I continue to consider long positions, as the market does not intend to reverse the trend.

Core Principles of My Analysis:

  1. Wave structures should be simple and clear. Complex structures are hard to trade and often bring instability.
  2. If you're uncertain about what's happening in the market, it's better to stay out.
  3. One can never be 100% sure of the direction. Always use Stop Loss orders for protection.
  4. Wave analysis can be combined with other types of analysis and trading strategies.
Chin Zhao,
Analytical expert of InstaForex
© 2007-2025
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