April CPI Report Set for Release
The highly anticipated Consumer Price Index (CPI) inflation report for the United States will be published by the Bureau of Labor Statistics (BLS) on Tuesday at 12:30 GMT. This report is expected to have far-reaching implications for the performance of the US Dollar (USD) and the future direction of interest rates set by the Federal Reserve (Fed).
Forecasts suggest that the annual inflation rate measured by the CPI will remain steady at 2.4% for April, unchanged from March. The core CPI, which excludes the often-fluctuating categories of food and energy, is predicted to maintain its year-over-year growth at 2.8%, mirroring the previous month’s figures. On a monthly basis, both the CPI and core CPI are projected to increase by 0.3%.
Analyzing Underlying Inflation Trends
Analysts from BBH have emphasized the importance of monitoring the super core inflation, which measures core services excluding housing. In a noteworthy trend, this measure fell to a four-year low of 2.9% in March, down from 3.8% in February, indicating potential shifts in underlying inflation dynamics. The rising tariffs might ultimately disrupt the current disinflationary trends, complicating the Fed's outlook.
Federal Reserve's Recent Policy Stance
During its May meeting, the Fed opted to keep the federal funds rate steady within the 4.25% to 4.50% range, adopting a cautious approach in light of increasing risks related to both inflation and unemployment. Fed Chairman Jerome Powell acknowledged during the subsequent press conference that inflation expectations in the short term have been heightened due to concerns regarding tariffs, thus underlining the necessity for a period of observation before any policy adjustments are made.
The CME FedWatch Tool currently suggests that the likelihood of a 25 basis points (bps) rate cut in June is approximately 15%, a decrease from 34% earlier in the month.
Impact of US-China Trade Negotiations
Recent trade discussions between the United States and China have shown substantial progress, with both sides agreeing to a temporary suspension of certain tariffs for a period of 90 days. This includes significant reductions in levies, such as the US lowering tariffs from 145% to 30%, and China from 125% to 10%. Such developments have fostered optimism regarding a potential trade truce and have fueled the USD’s recovery momentum ahead of the crucial CPI data release.
Potential Market Reactions Following CPI Data Release
A surprise uptick in the headline CPI could reinforce the expectations that the Fed will maintain its current policy through June, likely propelling the USD higher against other currencies, notably pushing the EUR/USD pair closer to the 1.1000 mark. Conversely, a softer CPI reading might revive bearish sentiments towards the USD, sparking a potential recovery for the EUR/USD as it could regain momentum toward the 1.1300 threshold.
Technical Outlook for EUR/USD
Technical analysis from industry experts suggests that the Relative Strength Index (RSI) on the daily chart has recently crossed the midline while the EUR/USD has moved below the 21-day Simple Moving Average (SMA) at 1.1317. Attempts to consolidate above the 1.1380 resistance have been unsuccessful. Immediate resistance lies at the 21-day SMA at 1.1322, with subsequent targets at 1.1380 and 1.1450. The initial support levels appear at the 50-day SMA at 1.1063 and the psychological mark of 1.1000.
Conclusion
As the market awaits the CPI report, all eyes will be on how this data could influence monetary policy and currency fluctuations. Investors are encouraged to approach the evolving landscape with an awareness of the inherent risks associated with trading in volatile markets.
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