The U.S. Bureau of Labor Statistics (BLS) will release May Consumer Price Index (CPI) data on Wednesday. The report is expected to show a further enhance in consumer inflation due to continued high oil prices amid the ongoing crisis in the Middle East.

The monthly CPI is forecast to enhance by 0.5% after a 0.6% enhance in April, while the annual reading is forecast to rise to the highest level since May 2023 at 4.2% from 3.8% in April. Core CPI data, which excludes volatile food and energy prices, is expected to grow by 0.3% and 2.9% on a monthly and annual basis, respectively.

Oil prices have increased by more than 50% since the conflict in the Middle East began on February 28. Although there was a piercing correction in oil prices in slow April after the United States (US) and Iran reached an agreement to cease military activities and begin negotiations to permanently end the war, the lack of progress in the talks and the re-escalation of tensions have allowed West Texas Intermediate (WTI) prices to remain depressed.

In response to Israel’s increased aggression in Lebanon, on Sunday, June 7, Iran fired missiles at Israel. The Israeli military carried out a retaliatory attack, hitting military targets in western and central Iran. The event marked the first exchange of strikes since an interim ceasefire agreement was reached.

Inflation data preview, “we expect core CPI inflation to relax in May after a shelter-inflicted spike that pushed the series to 0.38% m/m in April. The normalization of services prices should more than offset the slight increase in goods inflation, despite our expectation that airfares will gain additional strength. Energy prices remained unchanged thanks to the impact of still high oil prices,” TD Securities analysts said.

What can we expect from the next CPI data report?

CPI data for May will provide key clues on the impact of persistently high oil prices on consumer inflation. Because this is largely anticipated, core inflation data will support markets understand the rate at which rising energy costs are being fed through to the broader economy and pushing up the prices of other goods and services.

A reading above market expectations of 0.3% of the monthly core CPI may raise concerns about the continuation of high inflation in the economy. On the other hand, a print below analyst forecasts could ease fears that prices will get out of control.

However, even in the latter scenario Investors are unlikely to believe in a steady decline in inflation unless the US-Iran crisis ends and Oil prices return to pre-war levels. Even if the Strait of Hormuz reopens soon, it remains highly uncertain how long it will be before oil supplies reach full capacity and thus prices fall to pre-war levels.

Meanwhile, Federal Reserve (Fed) policymakers can continue to focus on containing inflation after another month of impressive labor market data. Therefore, it is unlikely that cushioned printing alone will significantly change market expectations regarding hawkish monetary policy.

The latest data released by the BLS shows that nonfarm payroll (NFP) employment increased by 172,000 in May. This printing followed an enhance of 179,000. (corrected from PLN 115,000) recorded in April and significantly exceeded market expectations of PLN 85,000.

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

According to the CME FedWatch Tool, markets now see about a 70% chance that the Fed will raise its key interest rate by 25 basis points (bps) at least once by the end of the year. Moreover, there is about a 38% chance that the rate enhance will take place in September.

A stronger-than-expected monthly core CPI print for May may enhance the risk of an interest rate enhance in September. In this scenario, the US dollar (USD) could gain strength as a result of the immediate reaction.

On the other hand, a cushioned CPI print could have the opposite effect on the USD valuation. Still, any negative impact on the USD may be short-lived and limit potential gains from the EUR/USD recovery.

Valeria Bednarik, Chief Analyst at FXStreet, notes: “The EUR/USD pair found buyers around 1.1500 and rebounded, but the recovery failed to erase the bearish tone of the pair. Sales pressure has eased, but a deeper recovery cannot be predicted, according to the technical readings on the weekly chart, which show the pair developing well below the slightly bearish 20-week simple moving average (SMA) at around 1.1670. The same chart shows that the technical indicators have risen but remain below the midline, although they lack directional strength.

Bednarik adds: “The immediate upside barrier is the threshold at 1.1600, ahead of the already mentioned dynamic resistance at 1.1670. Additional gains seem unlikely in the current scenario, however, the next area to watch if the rally continues will be the price zone at 1.1740. The 1.1500 mark is the immediate support level, and the more important one at 1.1470, which is a long-term static area support. A clear break below the latter should open the door to a more steep decline towards the 1.1400 area.”