The FX market is looking for the next big input to Dollar/risk sentiment in the US Consumer Price Index (CPI) report. But in the view of economists at ING, US inflation data will not be a game-changer in FX.
Our US economist agrees that rate cuts in March and April are too optimistic, but that conclusion could be reached even with a consensus CPI reading today. Core inflation is expected to come in at 0.3% MoM, and while supply chain bottlenecks continue to ease and energy prices fall, overall pricing pressures remain relatively strong.
While we may not see a big jump in the Dollar on a consensus CPI print (actually there are some downside risks given part of the market is possibly positioned for a strong number), we suspect the combination of only modest core inflation declines and lingering labour tightness will prompt the Fed to push back on rate cuts more forcefully. That is a Dollar-positive development, on paper, but a market seemingly anxious not to miss out on the next big USD lower may impatiently sell USD rallies. That is one of the reasons why our expectations for a short-term Dollar rebound are modest: a clearer narrative that rate cuts before May are unlikely needs to take over before Dollar bears can be discouraged.