- The US Consumer Price Index is forecast to rise 2.6% YoY in March.
- The core CPI inflation is seen a tad lower at 3% last month.
- The inflation data could influence the Fed’s rate outlook and the US Dollar’s performance.
The United States (US) Bureau of Labor Statistics (BLS) is set to publish the high-impact Consumer Price Index (CPI) inflation report for March on Thursday at 12:30 GMT.
The CPI figures could notably impact the US Dollar (USD) and the Federal Reserve’s (Fed) monetary policy outlook.
What to expect in the next CPI data report?
As measured by the CPI, inflation in the US is set to rise at an annual pace of 2.6% in March, down slightly from the 2.8% reported in February. Core CPI inflation, which excludes the volatile food and energy categories, is expected to ease to 3% in the same period from a year earlier, compared to a 3.1% growth in the previous month.
On a monthly basis, the CPI and the core CPI are projected to rise 0.1% and 0.3%, respectively.
Previewing the report, analysts at TD Securities noted: “We expect this week’s CPI report to show that core inflation maintained a still firm 0.26% m/m pace in March following the cooler than expected expansion in the last report. In the details, we look for goods inflation to cool down after two consecutive firm increases while services prices likely gained some momentum.”
“In terms of the headline, we project CPI inflation to ease again to a mild 0.07% m/m in March, led by a considerable contraction in the energy component. We also expect food inflation to lose additional momentum, printing flat m/m,” TD Securities analysts added.
How could the US Consumer Price Index report affect EUR/USD?
Markets are growing increasingly concerned over the US economy tipping into recession due to expectations of the global trade conflict triggered by US President Donald Trump’s aggressive tariffs weighing heavily on economic activity. In turn, the Federal Reserve (Fed) is now projected to take a dovish turn. According to the CME FedWatch Tool, markets are currently pricing in about a 37% probability of the Fed lowering the policy rate by 25 basis points (bps) at the May policy meeting, up from 10% on April 1.
Fed policymakers, however, put more emphasis on the potential impact of tariffs on inflation rather than the growth outlook in their recent speeches. “The Fed’s obligation is to make certain that a one-time increase in price levels doesn’t become an ongoing inflation problem,” Fed Chairman Jerome Powell said. Similarly, San Francisco Fed President Mary Daly said that she is concerned that inflation may pick back up from tariffs, while Chicago Fed President Austan Goolsbee noted that there is anxiety among businesses that high inflation will return.
The market positioning suggests that the USD is facing a two-way risk heading into the inflation data release. A stronger-than-expected annual headline CPI print could feed into expectations for a Fed policy hold in May and boost the USD with the immediate reaction. On the other hand, a reading at or below 2.5% in this data could weigh on the USD and help EUR/USD continue to push higher.
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 holds above 60 and EUR/USD trades above the 20-day Simple Moving Average (SMA) after testing this level several times in the past week, reflecting a bullish bias in the near term.
“On the upside, 1.1150 (static level) aligns as the next resistance before 1.1200 (static level) and 1.1275 (July 2023 high). Looking south, the first support could be spotted at 1.0880 (20-day SMA) ahead of 1.0800 (static level) and 1.0740 (200-day SMA).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
