The US Consumer Price Index (CPI) is set to soar to near three-year highs, raising concerns about inflation and prompting the Federal Reserve (Fed) to take action. This comes as no surprise, given the escalating conflict between the US and Iran, which has driven oil prices through the roof. The April CPI data, set to be released on Tuesday, is expected to show a significant increase in consumer inflation, mirroring March's sharp rise. The monthly CPI is projected to surge by 0.6%, up from 0.9% in March, while the annual reading is anticipated to reach 3.7%, its highest since September 2023. Core CPI, excluding volatile food and energy prices, is forecast to come in at 0.4% and 2.7% on a monthly and yearly basis, respectively.
The conflict in the Middle East has been a major catalyst for this inflationary surge. Since the beginning of the conflict on February 28, oil prices have skyrocketed by over 50%, and despite a slight correction in early May, they remain about 40% higher than before the US-Iran war. This is a critical factor in the upcoming CPI report, as it will reflect the impact of persistently high oil prices on inflation.
The implications of this data are far-reaching. A stronger-than-forecast core CPI print could fuel concerns about entrenched high inflation, prompting the Fed to consider rate hikes. Conversely, a softer reading might ease fears, but investors remain wary due to the unresolved US-Iran crisis and the ongoing risk to global energy supply chains. Minneapolis Fed President Neel Kashkari and St. Louis Fed President Alberto Musalem have emphasized the need for strong policy responses to manage inflation expectations.
The market's current sentiment is reflected in the CME FedWatch Tool, which predicts a 73% chance of the Fed keeping the policy rate unchanged at 3.5%-3.75% by year-end and a 20% probability of a 25 basis point hike. A stronger-than-forecast core CPI print could shift this dynamic, potentially leading to rate hikes later in the year, which would strengthen the US Dollar (USD). However, a soft core CPI print might have the opposite effect, but the impact on the USD's valuation could be short-lived unless there are significant developments indicating an end to the US-Iran conflict.
The technical outlook for EUR/USD is also intriguing. The currency pair is currently in a bullish stance, but it lacks strength. The Relative Strength Index (RSI) indicator on the daily chart is above 50 but retreats after testing 60, and the pair struggles to pull away from the 20-day Simple Moving Average (SMA). The first resistance area is at 1.1800-1.1820, where the upper limit of the Bollinger Band and the Fibonacci 61.8% retracement align. If EUR/USD stabilizes above this region, it could reach 1.1900-1.1910, followed by 1.2000. However, a strong support area has formed at 1.1730-1.1680, and a drop below this range could trigger technical selling.
In conclusion, the US Consumer Price Index report is a critical indicator of inflationary trends and their impact on the economy and currency markets. The upcoming data release will provide valuable insights into the Fed's monetary policy decisions and their potential effects on the USD and EUR/USD. As the conflict in the Middle East continues to escalate, the CPI report will be a key focus for investors and policymakers alike, shaping the economic landscape in the coming months.
