On April 12, the US Bureau of Labor Statistics (BLS) is set to release the Consumer Price Index (CPI) data for March. The markets are eagerly awaiting this report as it will provide insights into the Federal Reserve's next policy action and inflation developments. According to forecasts, the CPI data is expected to decline to 5.2% on an annualized basis, while the Core CPI is expected to edge a tad higher to 5.6%. Renewed concerns over the negative impact of rising interest rates on financial stability following the collapse of Silicon Valley Bank forced the Fed to adopt a cautious stance at its last policy meeting on March 22. Economists at Commerzbank believe that a fall in inflation would be ideal for a relatively more restrictive Fed and could result in an extended recovery for the US Dollar.
Investors will keep a close eye on the CPI data as it will determine whether another rate hike is necessary to bring inflation back down to the 2% target. A softer-than-expected reading, especially in the monthly core inflation, could lead to expectations for the Fed to keep its policy rate unchanged at the upcoming meeting. Conversely, a hotter US CPI reading is likely to reaffirm another 25 bps Fed hike and provide a boost to the USD, forcing the EUR/USD pair to turn south. The probability of a 25 bps rate hike currently sits at around 70%, according to the CME Group FedWatch Tool. The EUR/USD pair's bullish bias stays intact in the near term, with the 20-day Simple Moving Average continuing to pull away from the 50-day SMA following the bullish cross seen in early April.
In conclusion, the upcoming CPI data release for March will provide crucial insights into the Federal Reserve's next policy action and inflation developments. A disappointing reading could lead to expectations for the Fed to keep its policy rate unchanged, while a hotter US CPI reading is likely to reaffirm another 25 bps Fed hike and provide a boost to the USD. The markets will be closely watching this report, and investors will make their bets based on the data released.
