What to Expect from the US CPI Inflation and Implications for the USD!

Today we have two major central bank meetings and the FOMC minutes, but the US CPI inflation will likely steal the show when it gets released in a while. The US Dollar has been retreating for about a week despite stronger NFP figures last Friday, as markets fear a soft inflation reading today, so it’s interesting to see how the USD will react to CPI numbers for March.

USD Index DXY Chart Daily – MAs Are Holding As Support

Many analysts’ forecasts suggest a modest increase in headline CPI inflation for March, projected to rise by around 0.3% month-on-month and by 2 points YoY, from 3.2% to 3.4%. However, the core CPI, which excludes volatile food and energy prices, is anticipated to experience a slight decline of 0.1% year-on-year, from 3.8% to 3.7%, while the monthly number is expected to come at 0.3% as well. This dip is attributed to lower core goods prices and reduced pressure on service pricing.

If these predictions materialize, they could provide a reprieve from recent inflationary pressures, potentially bolstering the Federal Reserve’s confidence in its monetary policy stance. A lower-than-expected core CPI could alleviate concerns about persistent inflation and pave the way for the Fed to consider a rate cut in June. However, it’s essential to monitor actual CPI data releases to assess the accuracy of these forecasts and their implications for monetary policy decisions.

Higher Headline CPI but Lower in Core CPI: We anticipate a slight decrease in the core Consumer Price Index (CPI) for last month, with an expected decline to 3.7%% year on year. However, there are some who also expect a 2-point decline in month-on-month CPI. This is attributed to minor reductions in core goods prices and decreased pressure on core services prices.

Official Expectations for Headline CPI: The headline March CPI is forecasted to increase slightly, rounding up to around 0.3% month-on-month, indicating some inflationary pressures persisting in the economy.

FED Interest Rates: Should the CPI report align with most analysts’ expectations, then the odds of a June interest rate cut will fall further, after falling to around 50% previously. Otherwise, if there is an unexpected decline in the monthly core CPI, as well as on the YoY number, then it could strengthen the likelihood of the Federal Reserve initiating its rate-cutting cycle in June, which would send the USD further down. This sentiment echoes the current market forecasts, which suggest a 68% chance of a 25 basis point rate cut in June.

Upside Risks: However, if the CPI report proves significantly stronger than anticipated, it may challenge the expectation of a June rate cut, particularly if core CPI exceeds expectations and aligns more closely with a 0.3% month-on-month increase in core Personal Consumption Expenditures (PCE).