US CPI set to show steady inflation as focus turns to early tariff impact

• The US Consumer Price Index is set to rise 2.4% YoY in April, the same growth rate as in March.
• The core CPI inflation is forecast to hold steady at 2.8% last month.
• April’s inflation data could impact the Fed’s policy outlook, rocking the US Dollar.

The high-impact United States (US) Consumer Price Index (CPI) inflation report for April will be published by the Bureau of Labor Statistics (BLS) on Tuesday at 12:30 GMT.

The CPI data will likely have a significant impact on the US Dollar’s (USD) performance and the Federal Reserve’s (Fed) path forward on interest rates.

What to expect in the next CPI data report?

As measured by the CPI, inflation in the US is forecast to rise at an annual rate of 2.4% in April, at the same pace as in March. The core CPI inflation, which excludes the volatile food and energy categories, is expected to stay at 2.8% year-over-year (YoY) in the reported period, as against a 2.8% growth in the previous month.

On a monthly basis, the CPI and the core CPI are projected to rise by 0.3% each.

Previewing the report, analysts at BBH highlighted: “Keep an eye on super core (core services less housing), a key measure of underlying inflation. In March, super core inflation fell to a four-year low of 2.9% YoY vs. 3.8% in February.  Higher tariffs can ultimately derail the disinflationary process.”

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

At its May policy meeting last week, the Fed kept the federal funds rate unchanged in the range of 4.25% to 4.50%, maintaining a cautious stance on the policy outlook. The Fed’s policy statement underscored that risks of higher inflation and unemployment had risen.

During the post-policy meeting press conference, Fed Chairman Jerome Powell noted that near-term inflation expectations have increased due to tariffs and added that it's time for them to wait before adjusting policy. 

The CME FedWatch Tool currently indicates that the odds of a 25 basis points (bps) rate cut in June stand at 15%, down from about 34% at the start of the month.

Over the weekend, the US and China said they made substantial progress at the high-level trade negotiations in Geneva, Switzerland. The highly anticipated US-China joint statement on the first round of trade talks showed that both sides agreed to suspend part of their tariffs for 90 days, with tariffs to come down by 115 percentage points (US cut levies to 30% from 145% and China to 10% from 125%). 

Amid US-China trade deal optimism, the US Dollar (USD) build on its recent recovery momentum heading into the inflation data release. A surprise uptick in the annual headline CPI inflation print could affirm bets that the Fed will hold the policy in June. In this case, the USD could see another leg higher in an immediate reaction, smashing the EUR/USD pair back toward the 1.1000 threshold.

Conversely, a softer-than-expected reading could revive the USD downtrend on renewed dovish Fed expectations, helping EUR/USD stage a comeback toward the 1.1300 round figure.

Dhwani Mehta, Asian 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 has pierced through the midline from above as EUR/USD extends the break below the 21-day Simple Moving Average (SMA) at 1.1317 after having failed several attempts to find acceptance above the 1.1380 hurdle this month.”

“On the upside, the immediate resistance is at the 21-day SMA at 1.1322, above which the 1.1380 static level and 1.1450 psychological barrier will be targeted. Alternatively, the first support could be spotted at the 50-day SMA at 1.1063 and the 1.1000 mark.”