CPI Preview: How Will US Inflation Data Influence Major Currencies?

CPI Preview: How Will US Inflation Data Influence Major Currencies?

By Mohamed Hashad, Chief Market Strategist, Noor Capital

The looming CPI data for April 2024 is practically intriguing and warrants close analysis. Its potential impact on major currency performance in the forex market is significant. In this report, we will look closely into the background of this crucial inflation data and explore its implications for currency price action,

Mohamed Hashad, Chief Market Strategist, Noor Capital

CPI Overview

April’s CPI report is keenly awaited by analysts, traders, policymakers, and investors alike. The CPI report is expected by economists to show that inflation is still higher than the Federal Reserve’s 2% annual objective. Seasonally adjusted, the CPI grew by 0.4% in March (up 3.5% over the previous 12 months). So, what can we infer from the April inflation data?

Markets are bracing themselves for a 0.4% increase in the CPI, with a 0.3% increase in the core CPI (which does not include food and energy). These numbers are important because they have a direct bearing on decisions about monetary policy, which in turn affects currency prices.

The Fed’s Dilemma

The Fed has been balancing encouraging economic development with controlling inflation. Policymakers have been extremely vigilant due to the ongoing pressures of inflation. The Federal Reserve may hold more discussions if the April CPI supports this pattern. Will they keep moving in the direction of extended monetary tightening and interest rate increases to combat inflation? Or, in light of the shaky economic recovery, will they go off course? There is uncertainty around the future of the US dollar.

US Dollar: Caught By Inflation, Rate Expectations

The US dollar fluctuates between expectations for interest rates and worries about inflation. Should the CPI indicate more inflation, the Federal Reserve may decide to tighten monetary policy earlier, which would strengthen the dollar. On the other hand, the dollar might depreciate if officials continue to exercise patience, as Powell’s recent remarks, in response to Producer Prices Index reading, indicate. After the CPI report, investors pay particular attention to the Fed’s comments since any indications of rate increases could cause tremors in the currency markets.

It’s important to remember, too, that following Powell’s comments, the US dollar index (DXY) fell on anticipation of a dovish posture and possible rate cuts later in 2024.

Euro: ECB Is Watchful

The US CPI statistics are constantly monitored by the European Central Bank. Global inflationary pressures may spread even if European inflation is still low. The European Central Bank (ECB) might respond similarly if the Federal Reserve does. The swings of the dollar could impact the euro. The euro might, however, find support if the Fed begins to ease.

Japanese Yen: Weakening or Resilient?

The Japanese yen plays its unique tune. Despite low inflation in Japan, the yen’s fate hinges on risk sentiment. If investors shy away from high-risk assets due to inflation fears, the yen could strengthen. However, caution remains necessary, as the yen is well known for sudden moves.

Sterling

There are several choices and possibilities for the British pound sterling. Inflation is gradually rising as uncertainty over Britain’s departure from the European Union continues. In the meantime, the Bank of England is faced with a difficult decision: should it boost interest rates to aid in the post-pandemic recovery or control inflation? Is there a chance that the Bank of England’s tightening stance will boost the value of the pound sterling while an easing bias could undermine it?

Commodities-Linked Currencies

The Australian dollar and the New Zealand dollar are closely tied to commodities. Demand driven by inflation in commodities can bolster these currencies. However, both currencies monitor any signals or signs of slowdown in China—their major trading partner.

Canadian Dollar: Oil and Inflation

The Canadian dollar maintains a strong correlation with oil. Rising energy prices can lift the Canadian dollar. However, if inflation surges rapidly, the Bank of Canada may intervene. It’s prudent to monitor statements from the Canadian central bank officials for insights into their future path.

Swiss Franc: Safe Haven or Inflation Victim?

The Swiss franc serves as a safe haven, but it isn’t immune to inflation shocks. If global inflation persists, the Swiss franc may weaken against the US dollar. However, geopolitical tensions can also play a significant role in driving prices.

In the high-stakes currency chessboard, the Consumer Price Index (CPI) report serves as the opening move for several subsequent steps. Markets brace for price fluctuations, and investors and traders keenly watch central bank officials’ statements from major economies.