US CPI to Inform May Fed Rate Hike Bets

US Inflation To Cement May Hike Expectations

Traders are getting back to their desks after the long holiday Easter weekend and having to digest the Good Friday US employment data. The much-anticipated release showed a solid non-farm payrolls report with jobs gains remaining resilient while wage growth didn’t surprise to the upside. This should come as a relief to the Fed’s policymakers, although the labour market remains tight at this stage of the economic cycle.

The next big risk event on the calendar lands tomorrow with the latest US inflation data expected to support one more 25bp rate hike by the Fed at its next meeting in early May. Odds of this happening have jumped up from a near coin toss before the jobs data to above 70%, according to the CME FedWatch tool which looks at Fed funds futures for the May 3 date.

Headline CPI is expected to decline led by falling fuel costs, although this may be offset by high food inflation. Economists reckon another solid monthly core number (0.4% is expected) will worry policymakers as that is more than double the rate required over time to push back inflation to the FOMC’s 2% target. The Fed’s favourite CPI indicator – core services inflation less shelter – will also be in focus as this is disproportionately wage driven and remains sticky and elevated.

Inflation Conundrum: Fed Policy Impact on the US Dollar and the Euro

Recent commentary from Fed officials suggests they feel they have more work to do to ensure persistent inflation is eliminated. This could be highlighted in the minutes from the Fed’s March meeting which are released a few hours after the inflation data. Stubborn core figures will deal a further blow to any imminent pause in policy tightening. The dollar should be supported in this environment as it tries to rebound from its recent sell-off after the improvement in risk sentiment since the banking turmoil.

But a downside surprise in the data could add fuel to the disinflation story that Chair Powell has talked about recently and would push the greenback towards its year-to-date lows. That means EUR/USD will try to decisively break the 1.10 barrier.

Written on 11/04/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

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