The US calendar will be packed this week after the Easter holiday break, but CPI inflation figures will be at the center of attention on Wednesday at 12:30 GMT as monetary policy remains primarily a function of price stability. A pause in monetary tightening came into the Fed’s consideration during its previous policy meeting and the data might be indicative of whether a peak in interest rates will come sooner rather than later. Yet, forecasts suggest that there might be some way to go before we reach a terminal rate. If that proves to be the case, the dollar could stay resilient above its recent lows.
Another rate hike may come soon
Friday’s US nonfarm payrolls report revealed a slightly weaker but still a solid addition of 236k jobs, with the unemployment rate easing closer to previous record lows and the participation rate marking a new three-year high.
Rate expectations for a 25bps rate hike spiked to 70% from 50% previously in the aftermath. Still, the details warranted some caution in hiring as jobs growth came in below the six-month average of 334k, while the retail and construction sectors, which are more sensitive to rate increases, faced job losses. Moreover, the survey was completed a few days after the collapse of the California-based Silicon Valley Bank and New York’s Signature Bank. Hence, the effects from the baking turmoil and the announced layoffs may take some time before they show up in the data.
Meanwhile, the latest spike in weekly jobless claims is already increasing speculation for softer job prints in the coming months, though we can easily argue that the US labor market has been inelastic to the tightening cycle so far. In other words, it has barely weakened in response to continuous rate increases, making the rate cut pricing at the end of this year look premature.
CPI inflation to ease further but not at the target yet
Likewise, CPI inflation data could also play down lower interest rate expectations and hint at additional tightening ahead of May’s policy announcement. Although projections see headline inflation falling for the ninth consecutive month to 5.2% y/y from 6.0% previously, that would still be more than double the Fed’s symmetrical 2.0% average inflation target.
Strikingly, the core CPI measure, which excludes volatile prices such as food and energy, is expected to outstrip the headline measure, arriving marginally higher at 5.6% y/y. The latter could be a warning sign that inflation is becoming entrenched in the domestic price dynamics and interest rates may remain high for longer until price stability is achieved. A similar incident occurred during the 1970-1980 period when the then Federal Reserve chair Paul Volcker held interest rates high for an extended period of time, spurring a recession, though ultimately bringing inflation to the target.
US dollar outlook
As regards the US dollar, stronger-than-expected inflation readings could bode well for the currency. From a technical perspective, a break above the 133.45-133.75 region is required for dollar/yen to extend its recovery towards the next resistance area seen between 134.70 and 135.30. Monthly retail sales could add more fuel to the rally on Friday too if they beat expectations for a monthly decline of 0.3% and an annual expansion of 5.90%. Otherwise, a rapid downfall in retail sales would reflect fizzling demand, creating new downside pressures in the market at the end of the week, especially if the pair crosses below the 132.80 support region.
All in all, the Fed has not entirely abandoned its hawkish talk despite discussing the potential for a pause during its March gathering. Fed officials, including John Williams and James Bullard, returned to the wires recently to remind investors that the central bank will not abandon its task of getting inflation to the target, while seeing no need to adjust its balance sheet policy anytime soon. That leaves little room for surprises from the FOMC meeting minutes due on Wednesday at 18:00 GMT.
