US CPI data Preview: Headline inflation seen picking up in March, core to decline

• The US Consumer Price Index is set to rise 3.4% YoY in March, following the 3.2% increase in February.
• Annual core CPI inflation is expected to edge lower to 3.7% YoY in March.
• The inflation report could impact the market pricing of the June rate cut probability.

The high-impact US Consumer Price Index (CPI) inflation data for March will be published by the Bureau of Labor Statistics (BLS) on Wednesday at 12:30 GMT. Inflation data could alter the market’s pricing of the timing of the Federal Reserve (Fed) policy pivot at a time when investors have increasing doubts over the possibility of an interest-rate cut in June. Any surprise in inflation is expected to ramp up volatility around the US Dollar (USD).

What to expect in the next CPI data report?

Inflation in the United States (US) is forecast to rise at an annual pace of 3.4% in March, at a faster pace than the 3.2% increase recorded in February. The core CPI inflation rate, which excludes volatile food and energy prices, is forecast to tick down to 3.7% from 3.8% in the same period.

The monthly CPI and the core CPI are both seen increasing 0.3% in March.

While speaking at an event organized by the Stanford Graduate School of Business, Federal Reserve (Fed) Chairman Jerome Powell said that the policy rate was likely at its peak in this cycle but added that they were in no rush to reduce rates. “It’s too soon to say whether recent inflation readings are more than just a bump”, Powell said, adding that the Fed has time to let incoming data guide policy decisions.

Previewing the March inflation report, “we expect next week's CPI report to show that core inflation slowed to a ‘soft’ 0.3% m/m pace after posting an acceleration to around 0.4% in January/February,” said TD Securities analysts in a weekly report. “Used vehicle prices likely dropped back to deflation, while OER (Owners' Equivalent Rent) inflation possibly rose. Note that our unrounded core CPI forecast at 0.26% m/m suggests larger risks for a dovish surprise to a rounded 0.2% increase.”

How could the US Consumer Price Index report affect EUR/USD?

Following the 0.2% increase recorded in December, the Consumer Price Index (CPI) rose 0.3% and 0.4% in January and February, respectively, while the core CPI increased 0.4% in both months. These readings revived concerns over a slowdown in the disinflationary progress and caused market participants to refrain from forecasting a rate cut until June.

Meanwhile, the BLS reported an increase of 303,000 in Nonfarm Payrolls in March last Friday. This reading followed the 270,000 growth in February and surpassed the market expectation of 200,000 by a wide margin, highlighting tight conditions in the labor market. In turn, the CME FedWatch Tool’s probability of a 25 basis points rate reduction in June fell toward 50% from above 60% before the publication of the jobs report.

The market positioning suggests that the US Dollar faces a two-way risk heading into the inflation data release. In case the monthly core CPI rises 0.4% or more, it could give investors confidence that the Fed will stay on hold in June, especially after the impressive labor market data for March. In this scenario, the USD is likely to gather strength against its major rivals with the immediate reaction. On the other hand, a reading of 0.2% or lower could revive optimism about a continuation of disinflation and cause investors to lean toward a June rate cut, triggering a USD sell-off as a result.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart stays flat near 50 ahead of the US inflation data, highlighting EUR/USD’s indecisiveness in the short term. Additionally, the pair needs to break out of the 1.0830-1.0870 range, where the 200-day and the 100-day Simple Moving Averages (SMA) are located, to determine its next direction.”

“If EUR/USD rises above 1.0870 (100-day SMA) and starts using this level as support, it could target 1.0960 (Fibonacci 23.6% retracement level of the October-December uptrend) next. If 1.0830 (200-day SMA) support fails, technical sellers could take action and pave the way for an extended slide toward 1.0700 (end-point of the downtrend).”