• The US consumer price index is expected to escalate by 3.4% y/y in April, following a 3.5% escalate in March.
• Annual core CPI inflation is expected to decline to 3.6% in April.
• The inflation report could influence the timing of the Fed’s policy turnaround.

The Bureau of Labor Statistics (BLS) will release the most vital US inflation data – the Consumer Price Index (CPI) – for April at 12:30 GMT on Wednesday. Inflation data could change market pricing on the timing of the Federal Reserve’s (Fed) policy turnaround, while uncertainty over the interest rate outlook grows amid a hawkish tone from policymakers and disappointing macroeconomic data releases. Therefore, a surprise in CPI data may escalate the volatility of the US dollar (USD).

What can we expect from the next CPI report?

Inflation in the United States (US) is forecast to rise at an annual rate of 3.4% in April, slightly slower than the 3.5% escalate recorded in March. The core CPI inflation rate, which excludes volatile food and energy prices, is forecast to fall to 3.6% from 3.8% over the same period.

Monthly CPI and core CPI will escalate by 0.4% and 0.3%, respectively, in April.

Several Fed policymakers have recently expressed concerns about the inflation outlook. Richmond Fed President Thomas Barkin argued that a patient approach to policy would eventually bring inflation down to the 2% target, while Minneapolis Fed President Neel Kashkari noted that the lack of progress on inflation raised questions about the restrictiveness of the policy. Additionally, Fed Board of Governors member Michelle Bowman said she does not reasonably anticipate interest rate cuts this year, adding that she would like to see a range of better inflation data.

Reviewing the April inflation report, “we expect next week’s CPI report to show that core inflation has slowed to a ‘soft’ pace of 0.3% m/m after recording a third consecutive strong increase of 0.4% in March,” they said TD Securities analysts. “The headline probably rose by a milder 0.3% m/m despite another notable escalate in energy prices. It should be noted that our unrounded core CPI forecast of 0.27% m/m suggests a greater risk of a dovish surprise with a rounded escalate of 0.2%.

How could the US Consumer Price Index report impact EUR/USD?

After the 0.3% escalate recorded in January, the CPI and core CPI increased by 0.4% in both February and March, reviving concerns about a slowdown in the progress of disinflation and causing market participants to refrain from forecasting rate cuts until September.

Meanwhile, the BLS reported a 175,000 escalate in the number of nonfarm payroll workers in April. This marked the smallest escalate in employment since October and indicated a loosening labor market situation. Other U.S. data showed that business activity in the manufacturing and service sectors declined in April, with both the ISM Manufacturing and Services Purchasing Managers Index (PMI) being below 50. Additionally, the U.S. Department of Labor announced that there were 231,000 unemployment claims unemployment claims filed for the first time in the week ending May 4, the highest since the beginning of November.

Despite the high inflation numbers seen over the past few months, disappointing data releases maintain optimism about a monetary policy turnaround in September. According to the CME FedWatch Tool, investors currently estimate the probability of no change in Fed interest rates in September at 35%. Market positioning therefore suggests that the US dollar will be exposed to two-sided risk when inflation data is released.

If monthly core CPI increases by 0.4% or more, this may revive expectations for maintaining monetary policy in September. In this scenario, U.S. Treasury yields are likely to rise and allow the U.S. dollar to gain strength against its main rivals. On the other hand, a reading of 0.2% or less could have the opposite effect on the currency’s valuation.

Eren Sengezer, Chief Analyst for the European Session at FXStreet, presents a brief technical forecast for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart remains above 50, but EUR/USD needs to move to the 1.0800-1 area, 0820, where the 200-day and 100-day simple moving averages (SMAs) are located, provide support to extend the uptrend. Above this 1.0900 area (static level) can be seen as interim resistance ahead of 1.0980 (March 8 high).”

“If EUR/USD fails to clear the 1.0800-1.0820 area, buyers may become discouraged. In this case, support can be seen at 1.0720 (20-day SMA) and 1.0600 (April 16 low).”