16.10.202600:49 Forex Analysis & Reviews: EUR/USD. PPI + Retail Sales: The Inflation Puzzle Falls Into Place for the Dollar

The US PPI and Retail Sales reports landed in the "green zone," bolstering dollar bulls. Although the retail-sales release has shortcomings (see below), producer-side inflation clearly sided with the greenback, accelerating, including in core measures. Combined with Wednesday's CPI, Thursday's releases have effectively completed the inflation puzzle in favor of dollar bulls. Therefore, the current rise in EUR/USD still looks corrective in my view: the prevailing fundamental backdrop does not support a trend reversal.

Headline PPI rose 1.3% month-on-month in September — the fastest monthly pace since March 2022. The year-on-year rate accelerated to 6.3%. Core PPI also accelerated materially: monthly core PPI rose 0.7% (consensus 0.3%), and the annual rate increased from a revised 4.8% to 5.0%.

So in September the hawks prevailed not only on the headline measure but on the core as well.

Energy unquestionably played a key role in the PPI acceleration. The energy component increased almost 11% (10.8%), and gasoline jumped 20% month-on-month. Final-demand goods rose 2.6%, with energy accounting for more than 80% of that increase. Food added 1.2%. However, goods excluding food and energy rose only 0.3% after a 0.4% print in August.

What does this tell us? That the acceleration in core PPI must be sought in services.

Indeed, services prices rose 0.8% in September, up from 0.2% the prior month. Trade margins rose 1.4%, and transportation and warehousing rose 3.4%. Wholesale margins on equipment and motor vehicles jumped 3.9%, contributing over one-fifth of the service-component increase. Freight trucking, hotel services and passenger air fares also gained. Even the measure excluding food, energy and trade margins accelerated to 0.5% (from 0.3%). In other words, even excluding the most volatile components, price growth is substantial and signals persistent producer-side inflation.

This structure is consistent with a partial "bleed-through" of the energy shock into core categories: expensive fuel raises the cost of transportation, delivery and business services. Still, one report cannot quantify how widespread that process is. Moreover, rising trade margins cannot be explained solely by higher fuel costs — company pricing policy and the spread between purchase and selling prices also play roles. The rise in services outside trade and transport suggests inflationary pressure is broadening beyond the energy channel.

Wednesday's CPI complements this picture. Headline consumer inflation accelerated from 3.4% to 3.7% year-on-year, and core CPI rose from 2.4% to 2.6%. Monthly core CPI stayed at 0.3%, while services (excluding energy) accelerated to 0.4% and core goods to 0.3%.

Thus, price pressure has strengthened significantly — both at the producer and consumer levels. Although rising producer costs do not immediately or fully translate into final prices, strong PPI and CPI together point to a risk that elevated inflation will persist for an extended period.

Retail sales sided with the greenback on Thursday as well — though there are caveats. Headline retail sales rose 0.8% month-on-month versus a 0.3% forecast (and August's gain was revised up to 1.3%). Ex-auto retail sales increased 0.9%. Strong categories included furniture and home goods (+1.3%), department stores (+1.6%), and restaurants & bars (+1.1%). Online retail grew 0.3%. All this indicates spending activity remains intact even after a strong prior month.

But, as noted, there are "buts." Gasoline station sales jumped 7.1%, while ex-auto & gas, the overall gain was only 0.2%. The control group used to estimate consumer spending in GDP added just 0.1% after 1.2% previously. The report also measures nominal receipts, so higher prices inflate the revenue figure without a corresponding rise in physical volumes. In other words, this isn't a consumer boom, but it's also not a collapse that would outweigh strong CPI and PPI.

Put another way, Wednesday's and Thursday's releases reinforce hawkish expectations: inflation is picking up while consumer spending remains resilient. That does not mean the Federal Reserve will automatically hike at the October meeting, but it is now on the table alongside other possibilities.

The euro, meanwhile, remains under pressure from France's sovereign-debt problems. Investors doubt Paris's ability to agree on a budget and reduce the deficit amid political divisions. The European Central Bank is staying cautious: September's 25-bp hike was not accompanied by pledges of further tightening.

All this suggests there are still no solid grounds for a trend reversal in EUR/USD. US releases strengthened the greenback, while euro-weakening factors remain in place. The inflation puzzle has fallen into the dollar's favor, so long positions look risky, and after the current corrective rally sellers may regain the initiative.

Technically, on the 4-hour chart, the pair trades between the middle and upper Bollinger Band lines, above Tenkan-sen and Kijun-sen but below the Kumo cloud. From current levels, one can consider short positions targeting 1.1170 — at that level, the Bollinger middle line coincides with Tenkan-sen and Kijun-sen on H4. In my view, a more reliable approach is to sell after a break above that support level, followed by a close back below it. In that case, price will sit between the middle and lower Bollinger lines on H4, and Ichimoku will generate a bearish "Parade of Lines" signal, confirming the priority of the bearish scenario.