Consumer Price Index key to figure out what’s next for the Federal Reserve

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• Annualized Consumer Price Index in the US is expected to rise 5.0% in April, holding steady from March numbers.
• Core CPI inflation is foreseen at 5.5% YoY in April, down from March’s 5.6% clip.
• US Dollar set to rock as US CPI could have a significant impact on the Fed’s rate outlook.

The Consumer Price Index (CPI) data release for April, published by the US Bureau of Labor Statistics (BLS), is scheduled for May 10 at 12:30 GMT. 

The United States Dollar (USD) has been attempting a tepid recovery after a strong April Nonfarm Payrolls report. The Loan Officer Survey, published by the Federal Reserve (Fed) on Monday, showed that US credit conditions were less gloomy than expected, which is also aiding the US Dollar rebound. 

Markets now eagerly look forward to the inflation data to gauge how the Fed might adjust its monetary policy at its next meeting in June, looking for fresh USD valuations.

Follow our live coverage of the market reaction to US inflation data.

What to expect in the next CPI data report?

The US Consumer Price Index data, on an annualized basis, is foreseen to rise 5.0% in April, the same pace as in March. The Core CPI number, which excludes volatile food and energy prices, is expected to rise 5.5%, a tad below the 5.6% print reported in March.

Over the month, the headline Consumer Price Index is foreseen to accelerate, with a 0.4% increase expected in April, up from the 0.1% increase registered in March. However, the Core CPI is expected to keep rising 0.4%, the same pace as the previous month.  

The US CPI data will hold the utmost relevance for the Federal Reserve, as the US central bank made it clear at its May 3 policy meeting that “it will take data a dependent approach to determine the extent of further rate hikes” as elevated inflation levels and the banking sector stress remain in focus. The Fed raised the target range for the federal funds rate by the expected 25 basis points (bps) to 5.0%-5.25%. Federal Reserve Chairman Jerome Powell, however, adopted a cautious tone during his press conference, noting that the Fed is prepared to adjust the stance of monetary policy as appropriate if risks emerge. 

US bank shares plunged last week, as a crisis of confidence in the country’s banking sector continued. Shares in California-based PacWest plunged 50%, while Western Alliance stock also tumbled nearly 40%. The sell-off in bank shares gathered steam this week after First Republic was seized by regulators and sold to America’s biggest bank, JPMorgan Chase.

Analysts at TD Securities provide a brief preview of the key macro data and explain: “Market attention this week will focus on April CPI data following a payrolls report that was less strong than the headline beat would suggest. We look for core-price inflation to stay firm again, with the index rising a strong 0.4% MoM for a second straight month, as goods inflation likely continued to gain momentum.”

When will be the Consumer Price Index report and how could it affect EUR/USD?

The CPI data report is scheduled for release at 12:30 GMT, on May 10. A softer-than-expected reading, especially in the monthly core inflation, could ramp expectations for a Fed rate cut in the second half of this year. According to the CME Group FedWatch Tool, markets are currently pricing roughly a 90% probability of a Federal Reserve pause in June while seeing a 33% chance of a rate cut as early as July.

Last week’s US Nonfarm Payrolls blowout and Jerome Powell’s commentary pushed back on market expectations of a rate cut this year but the overnight index swaps (OIS) only partially trimmed rate-cut expectations for July. The headline US Nonfarm Payrolls (NFP) jumped by 253K in April, better than both the 179K expected and the previous figure of 165K. The Unemployment Rate unexpectedly ticked lower to 3.4% in April while the annualized Average Hourly Earnings rose to 4.4% in the reported month vs. 4.2% expected.

The wage inflation unexpectedly accelerated in April and, therefore, the April CPI data will be closely examined to determine whether the Fed could stay on hold for longer before opting for rate cuts later this year.

A downbeat CPI print will reinforce market expectations of Fed rate cuts sooner (than later), re-fuelling the US Dollar downtrend. This, in turn, should allow the EUR/USD pair to resume its bullish momentum, targeting the 1.1100 level yet again. On the other hand, surprisingly stronger inflation data from the United States could lead to a re-pricing of the Fed’s interest rates outlook, in turn, offering an additional leg to the ongoing recovery in the US Dollar.

The US Dollar is set to rock on immediate market reaction, as any meaningful divergence from the expected readings should infuse extreme volatility in the markets and allow traders to grab short-term opportunities around the EUR/USD pair.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “EUR/USD settled below the critical short-term 21-Day Moving Average (DMA) support at 1.0997 on Tuesday. With the 14-day Relative Strength Index (RSI), however, still defending the midline, Euro buyers remain hopeful. 

Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, EUR/USD buyers need to find a foothold above the bullish 21 DMA support-turned resistance, above which Monday’s high of 1.1053 could be challenged. A sustained break above the latter will re-open doors toward the yearly high of 1.1095.”

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