The United States Bureau of Labor Statistics (BLS) is set to release its highly anticipated Consumer Price Index (CPI) report for March on Thursday at 12:30 GMT. The consensus among Wall Street analysts is that inflation will continue to rise at a rate of 2.6% per year. At the same time, core CPI inflation—excluding food and energy prices—is projected to cool to 3%. These numbers come on the heels of some recent uncertainty. Tariff policies and market positioning are upending the ordering principles of the USD.
As the market braces for the CPI data, the Relative Strength Index (RSI) indicator on the daily chart currently holds above 60, suggesting bullish momentum. Photo by Kittinun Sukhium on Canva Pro Currently, the EUR/USD currency pair is trading above the 20-day Simple Moving Average (SMA), indicating bullish Euro sentiment as risk appetite increases. The British Pound is taking advantage of this positive sentiment, adding to an exciting trading atmosphere.
Market Dynamics and Expectations
In many ways, Fed policymakers have moved the goalposts. Today, they are focused on limiting growth outlooks because of how tariffs could be raising inflation, instead. This shift in focus doesn’t mean that inflationary pressures will be a dominating factor in future monetary policy decisions. Alternatively, a stronger-than-expected headline CPI print would likely strengthen the case for a Federal Reserve (Fed) policy hold in May.
Today’s market positioning suggests that the USD is at a two-way risk. Traders are monitoring all economic data, but eyeing high frequency indicators of inflation most closely. They’ve priced in roughly a 37% chance of a 25 basis point reduction in the new policy rate at the May meeting.
“The Fed’s obligation is to make certain that a one-time increase in price levels doesn’t become an ongoing inflation problem,” – Fed Chairman Jerome Powell
The upcoming CPI report will be pivotal. TD Securities analysts expect core inflation to remain elevated at 0.26% m/m in March. As a reminder, last month’s report was the first to include cooler-than-expected CPI figures. Assuming this forecast is correct, that would be good news for fears about persistent inflation.
Impact of Tariff Policies
Political developments with tariff policy have played a role in increasing volatility across currency pairs. Former President Donald Trump made the call to suspend tariff hikes. As a result of this decision, currencies like the Euro and British Pound were able to recover strength against the USD. This pause seems to have given a much-needed shot of confidence into the markets, indicating an eagerness among investors to jump back into riskier assets.
This accommodating environment has provided fertile ground for the British Pound to prosper, as traders show their hand with an uptick in risk appetite. Positive economic surprises continue to roll in from Europe, and the US tariff picture seems to be stabilizing at worst. This makes it a unique moment for these currencies to establish themselves.
The Road Ahead
The market is getting ready for the CPI report. All eyes are poised to taste the first drops of inflation’s rain on the parade of bullish economic predictions. In the monthly projection CPI is projected to increase 0.1% and core CPI to increase 0.3%. Such changes could influence monetary policy discussions as the Fed navigates through the complexities of inflation and tariffs.
The excitement ahead of this week’s CPI report reflects how tricky the balancing act between stabilizing price levels and stimulating economic growth can be. How all this influences trader sentiment and future action by the Federal Reserve in the coming data stay tuned.