US CPI data expected to show slow progress towards 2% target

■The US Consumer Price Index is set to rise 3.4% YoY in April, following the 3.5% increase in March.

■Annual core CPI inflation is expected to edge lower to 3.6% in April.

■The inflation report could influence the timing of the Fed’s policy pivot.

The high-impact US Consumer Price Index (CPI) inflation data for April will be published by the Bureau of Labor Statistics (BLS) on Wednesday at 12:30 GMT. Inflation data could alter the market’s pricing about the timing of the Federal Reserve (Fed) policy pivot, while uncertainty regarding the rate outlook grows amid policymakers’ hawkish tone and disappointing macroeconomic data releases. Hence, a surprise in CPI data could ramp up the US Dollar’s (USD) volatility.

What to expect in the next CPI report?

Inflation in the United States (US) is forecast to rise at an annual pace of 3.4% in April, at a slightly softer pace than the 3.5% increase recorded in March. The core CPI inflation rate, which excludes volatile food and energy prices, is forecast to edge lower to 3.6% from 3.8% in the same period.

The monthly CPI and the core CPI are seen increasing 0.4% and 0.3%, respectively, in April.

Several Fed policymakers have recently voiced their concerns over the inflation outlook. Richmond Fed President Thomas Barkin argued that a patient approach to policy would eventually reduce inflation toward the 2% target, while Minneapolis Fed President Neel Kashkari noted that the lack of progress in inflation was raising questions about how restrictive the policy is. Moreover, Fed Board of Governors member Michelle Bowman said that she doesn’t rate cuts as warranted this year, adding that she would like to see a number of better inflation data.

Previewing the April inflation report, “we expect next week's CPI report to show that core inflation slowed to a "soft" 0.3% m/m pace after posting a third consecutive strong gain at 0.4% in March,” said TD Securities analysts. “The headline likely rose by a softer 0.3% m/m despite another notable gain in energy prices. Note that our unrounded core CPI forecast at 0.27% m/m suggests larger risks for a dovish surprise to a rounded 0.2% increase.”

How could the US Consumer Price Index report affect EUR/USD?

Following the 0.3% increase recorded in January, the CPI and the core CPI rose 0.4% both in February and March, reviving concerns over a slowdown in the disinflationary progress and causing market participants to refrain from forecasting a rate cut until September.

Meanwhile, the BLS reported an increase of 175,000 in Nonfarm Payrolls in April. This marked the smallest growth in payrolls since October and pointed to loosening conditions in the labor market. Other data from the US showed that the business activity in the manufacturing and service sectors contracted in April, with the ISM Manufacturing and Services Purchasing Managers Index (PMI) both coming in below 50. Additionally, the US Department of Labor announced that there were 231,000 first-time applications for unemployment benefits in the week ending May 4, the highest print since early November. 

Despite the strong inflation figures seen in the last couple of months, disappointing data releases keep the optimism about a policy pivot in September alive. According to the CME FedWatch Tool, investors are currently pricing in a 35% probability of a no change in the Fed interest rate in September. Hence, the market positioning suggests that the US Dollar faces a two-way risk heading into the inflation data release.

In case the monthly core CPI rises 0.4% or more, it could revive expectations for a policy hold in September. In this scenario, US Treasury bond yields are likely to gain traction and allow the USD to gather strength against its major rivals. On the other hand, a reading of 0.2% or lower could have the opposite impact on the currency’s valuation.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart stays above 50 but EUR/USD needs to flip 1.0800-1.0820 area, where the 200-day and the 100-day Simple Moving Averages (SMA) are located, into support to extend its uptrend. Above this area, 1.0900 (static level) could be seen as interim resistance before 1.0980 (March 8 high).”

“If EUR/USD fails to clear 1.0800-1.0820 area, buyers could get discouraged. In this case, supports could be seen at 1.0720 (20-day SMA) and 1.0600 (April 16 low, static level).”