Market Data 
- The US Consumer Price Index is set to rise 3.4% YoY in March, following the 3.2% increase in February.
- Annual core CPI inflation is expected to edge lower to 3.7% YoY in March.
- The inflation report could impact the market pricing of the June rate cut probability.
The high-impact US Consumer Price Index (CPI) inflation data for March will be published by the Bureau of Labor Statistics (BLS) on Wednesday at 12:30 GMT. Inflation data could alter the market’s pricing of the timing of the Federal Reserve (Fed) policy pivot at a time when investors have increasing doubts over the possibility of an interest-rate cut in June. Any surprise in inflation is expected to ramp up volatility around the US Dollar (USD).
What to expect in the next CPI data report?
Inflation in the United States (US) is forecast to rise at an annual pace of 3.4% in March, at a faster pace than the 3.2% increase recorded in February. The core CPI inflation rate, which excludes volatile food and energy prices, is forecast to tick down to 3.7% from 3.8% in the same period.
The monthly CPI and the core CPI are both seen increasing 0.3% in March.
While speaking at an event organized by the Stanford Graduate School of Business, Federal Reserve (Fed) Chairman Jerome Powell said that the policy rate was likely at its peak in this cycle but added that they were in no rush to reduce rates. “It’s too soon to say whether recent inflation readings are more than just a bump”, Powell said, adding that the Fed has time to let incoming data guide policy decisions.
Previewing the March 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 an acceleration to around 0.4% in January/February,” said TD Securities analysts in a weekly report. “Used vehicle prices likely dropped back to deflation, while OER (Owners’ Equivalent Rent) inflation possibly rose. Note that our unrounded core CPI forecast at 0.26% 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 0.2% increase recorded in December, the Consumer Price Index (CPI) rose 0.3% and 0.4% in January and February, respectively, while the core CPI increased 0.4% in both months. These readings revived concerns over a slowdown in the disinflationary progress and caused market participants to refrain from forecasting a rate cut until June.
Meanwhile, the BLS reported an increase of 303,000 in Nonfarm Payrolls in March last Friday. This reading followed the 270,000 growth in February and surpassed the market expectation of 200,000 by a wide margin, highlighting tight conditions in the labor market. In turn, the CME FedWatch Tool’s probability of a 25 basis points rate reduction in June fell toward 50% from above 60% before the publication of the jobs report.
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 give investors confidence that the Fed will stay on hold in June, especially after the impressive labor market data for March. In this scenario, the USD is likely to gather strength against its major rivals with the immediate reaction. On the other hand, a reading of 0.2% or lower could revive optimism about a continuation of disinflation and cause investors to lean toward a June rate cut, triggering a USD sell-off as a result.
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 flat near 50 ahead of the US inflation data, highlighting EUR/USD’s indecisiveness in the short term. Additionally, the pair needs to break out of the 1.0830-1.0870 range, where the 200-day and the 100-day Simple Moving Averages (SMA) are located, to determine its next direction.”
“If EUR/USD rises above 1.0870 (100-day SMA) and starts using this level as support, it could target 1.0960 (Fibonacci 23.6% retracement level of the October-December uptrend) next. If 1.0830 (200-day SMA) support fails, technical sellers could take action and pave the way for an extended slide toward 1.0700 (end-point of the downtrend).”
Economic Indicator
Consumer Price Index (YoY)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
