The US Bureau of Labor Statistics (BLS) is set to publish the CPI data release for March on April 12 at 12:30 GMT. Despite outperforming major rivals for a couple of days following the upbeat March jobs report, the US Dollar (USD) is struggling to gather bullish momentum.
Markets are uncertain about the Federal Reserve’s (Fed) next policy action, and the upcoming inflation developments could provide fresh clues.
Economists are forecasting that the CPI data will decline to 5.2% on an annualized basis, and the Core CPI, which excludes volatile food and energy prices, is expected to edge slightly higher to 5.6% from the 5.5% registered in February.
In February, the headline CPI data is predicted to increase by 0.3% MoM, compared to a 0.4% increase reported in February, while the Core CPI is expected to increase by 0.4%, down slightly from 0.5% previously.
The CPI data will be crucial as the Federal Reserve tries to determine whether another rate hike is necessary to bring inflation back down to the 2% target. Following the collapse of Silicon Valley Bank, renewed concerns over the negative impact of rising interest rates on financial stability forced the Fed to adopt a cautious stance at its last policy meeting on March 22.
The Fed hiked its policy rate by 25 basis points (bps) to the range of 4.75%-5% as expected but noted that tighter credit conditions are expected to weigh on economic activity, hiring, and inflation.
According to Commerzbank economists, a relatively more restrictive Fed accompanied by a fall in inflation would be ideal. They argue that a fall in inflation is a positive argument for the currency involved.
A softer-than-expected reading in the CPI data, particularly in the monthly core inflation, could revive expectations for the Fed to keep its policy rate unchanged at the upcoming meeting.
The March jobs report showed that Nonfarm Payrolls rose by 236,000, slightly below the market expectation of 240,000. Additionally, the Unemployment Rate edged lower to 3.5%, while the annual wage inflation, as measured by the Average Hourly Earnings, edged lower to 4.2% from 4.6%.
There are signs of softening in the US labor market, and the March CPI data could help investors decide if they should bet on one more Fed rate increase. The probability of a 25 bps rate hike currently sits at around 70%, according to the CME Group FedWatch Tool.
A disappointing CPI print could lead to a fresh leg lower for the US Dollar, allowing the EUR/USD pair to regather bullish momentum. On the other hand, a hotter-than-expected CPI reading could reaffirm another 25 bps Fed hike and provide a boost to the USD, forcing the EUR/USD to turn south.
FXStreet Analyst Eren Sengezer notes that the EUR/USD’s bullish bias remains intact in the near term. Interim resistance appears to have formed at the 1.0950/60 area. Once the pair clears that level and confirms it as support, 1.1000 (psychological level) aligns as the next bullish target before 1.1035 (2023 high) and 1.1100 (psychological level, static level).
On the downside, a daily close below 1.0800 (20-day SMA) could ramp up the bearish pressure and open the door for an extended slide toward 1.0740 (50-day SMA) and 1.0700 (100-day SMA)