The US Consumer Price Index is expected to gain 3.4% annually in March after the 3.2% rise in February. The annual core CPI inflation is projected to fall slightly to 3.7% on a year-on-year basis in March. The inflation report may affect the market pricing of a June rate cut.
Inflation data
The high-impact US Consumer Price Index (CPI) inflation data for March will be published by the Bureau of Labour Statistics (BLS) on Wednesday at 12:30 GMT. The rates will have an impact on the timing of the Federal Reserve (Fed) rate cut as investors are uncertain about an interest-rate cut in June due to rising inflation. An unforeseen drop in inflation could create unexpected volatility in the USD.
What can be expected from the upcoming CPI data?
The United States (US) inflation is predicted to rise with an annual rate of 3.4% in March and it is expected to exceed the 3.2% increase recorded in February. The Core CPI inflation that is composed of the prices that are not volatile (and excludes food and energy prices) is anticipated to drop down to 3.7% from 3.8% from the same period. If both headline CPI and Core CPI rate come in as expected, then they may lessen the impact that each of the rates may have on the greenback. But if headline CPI comes in as expected or even higher, and the Core CPI also increases, then the USD will strengthen. This in turn will add more pressure on the Fed to remain hawkish and will allow them to keep higher rates for longer.
Speaking at an event organised by the Stanford Graduate School of Business, Federal Reserve (Fed) Chairman Jerome Powell said that interest rates were probably at the top in this cycle, nevertheless he is in no rush to lower them. Addressing the subject of stubborn inflation Powell said that it is too soon to say whether the latest readings are only “just a bump” and that the Fed has some time to wait for data to guide their policy decisions.
How will the report affect the USD?
Following the 0.2% increase in December, the CPI went up 0.3% and 0.4% in January and February, with the core CPI jumping by 0.4% in both months. Such readings ignited fears over the lack of further disinflation and caused market participants to refrain from predicting a rate cut until June.
Additionally, the BLS reported an increase of 303,000 Nonfarm Payrolls in March on Friday last week. This data comes after the 270,000 job increase last February and beat market expectations of 200,000, revealing the tightness of the labour market. On the other hand, the probability of a 25 basis points rate cut in June dropped to nearly 50%, down from above 60% before the release of the unemployment report.
Market positioning implies the greenback may go either way concerning the inflation data. If monthly core CPI rises by 0.4% or more, then investors may become more confident in the view that Fed will stay on hold in June, after the rather good labour market conditions in March. In such a case, the USD could gain against its major competitors. On the other hand, an inflation reading of 0.2% or lower could renew hopes of a disinflation trend and therefore could increase bets for a June cut. In this case, the USD could weaken.