Forex Trading Library

US March Inflation: More Reason for a Delay in Rate Cuts?

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Markets have been under performing lately, which has been a boon for the dollar. The main reason is that the chances of a rate hike at the June Fed meeting have been receding. There is still a majority of traders who expectMarket awaits US March inflation data as expectations of a June rate hike wane. Mixed signals from inflation measures may drive volatility, easing to start in June. But the percentage has gone down drastically from 63% last week to just 51% today.

If it continues that pace, and the market moves to price in the next rate hike for the third quarter of the year, the dollar could keep seeing gains. By extension, currencies that were expected to see their interest rates move in tandem with the US (such as the Euro), could end up weaker by comparison. Tomorrow’s data release could do a lot to move expectations here.

Getting Inflation Back into Range

One of the issues is that the different measures of US inflation have been providing mixed signals. The one that matters most to the people, headline inflation, has been rising lately. Meanwhile, the one that matters most to the Fed, personal consumption expenditure, has been trending down. The market often likes to look at the core rate, because that excludes the more volatile elements of food and energy. That has been charting a somewhat middle course, trending lower but not as fast as the PCE.

What could get in the way of the market reaction to tomorrow’s data is that the next Fed meeting won’t happen until after the PCE data for March is released. Generally the Fed cares more about PCE than CPI, though they often coincide in terms of direction. But the disconnect lately has fueled increased volatility in the markets.

What to Look Out For

The Fed is looking to see consistent easing in inflationary pressures before moving to ease. If the headline rate keeps moving higher, that could get in the way of showing the pattern that the Fed wants to see. Which means there could be a delay in the start of easing, even if the Fed still plans to cut rates to the same amount by the end of the year.

The US March Inflation rate is expected to bounce back to 3.4% from 3.2% prior, mostly thanks to higher gasoline prices as the price of crude has been rising. But the core rate is seen staying the course, ticking down to 3.7% from 3.8% prior. That the monthly numbers show a lower rate will also help affirm a narrative that the current bump up in inflation is transitory.

We’ve Heard That Before

What could surprise the markets is if headline inflation doesn’t increase this time around. That could inject a substantial amount of dovishness into the markets, with the dollar losing the gains it has seen over the last couple of weeks.

What could surprise on the upside, however, is if core inflation remains unchanged. And that’s a real possibility given the small drop that’s expected. A beat by just two decimal points would point to the core rate rising for the first time in months. That could be interpreted as confirmation that the rate cut in June is off, and push the dollar higher.

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