US CPI to grow at a slower pace in April amid growing concerns about a rebound in inflation

• The US Consumer Price Index will increase 3.4% annually in April, following the 3.5% increase recorded in March.
• Annual core CPI inflation is expected to decline to 3.6% in April.
• The inflation report could influence the Fed in deciding when to pivot its monetary policy.

On Wednesday at 12:30 GMT, the Bureau of Labor Statistics (BLS) will release high-profile US Consumer Price Index (CPI) inflation data for April. Inflation data could alter the market's assessment of the timing of the Federal Reserve's (Fed) policy shift, as uncertainty grows around the outlook for interest rates amid a hawkish tone from policymakers and the publication of disappointing macroeconomic data. Therefore, a surprise in the CPI data could increase the volatility of the US Dollar (USD).

What to expect from the next CPI?

Inflation in the United States (US) is expected to rise at an annual rate of 3.4% in April, slightly slower than the 3.5% increase recorded in March. The core CPI inflation rate, which excludes food and energy price volatility, would drop to 3.6% from 3.8% in the same period.

The monthly CPI and the core CPI will increase by 0.4% and 0.3%, respectively, in April.

Several Fed officials have recently expressed concern about the outlook for inflation. Richmond Fed President Thomas Barkin argued that a patient approach to policy would eventually bring inflation down toward the 2% target, while Minneapolis Fed President Neel Kashkari noted that the lack of progress on Inflation was raising questions about the degree of policy tightening. Separately, Michelle Bowman, a member of the Fed's Board of Governors, stated that she does not consider it justified to cut rates this year, and added that she would like to see a better set of inflation data.

Looking ahead to April's inflation report, “we expect next week's CPI to show that core inflation slowed to a gentle 0.3% month-on-month after posting a third consecutive strong rise of 0.4% in March.” “, TD Securities analysts said, “and headline inflation is likely to rise 0.3% month-on-month, despite another notable rise in energy prices.” Note that our unrounded Core CPI forecast of 0.27% MoM suggests higher risks of a moderate surprise versus a rounded 0.2% increase.”

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

Following the 0.3% increase in January, the CPI and core CPI rose 0.4% in both February and March, reviving concerns about a slowdown in disinflationary progress and causing market participants refrained from forecasting a rate cut until September.

Separately, the BLS reported an increase of 175,000 non-Farm payrolls in April. This is the lowest payroll growth since October and points to a relaxation in the labor market. Other US data showed that business activity in the manufacturing and services sectors contracted in April, with the ISM manufacturing and services Purchasing Managers' Index (PMI) both below 50. Furthermore, The US Department of Labor announced that in the week ending May 4, 231,000 first applications for unemployment benefits had been registered, the highest number since early November.

Despite solid inflation numbers over the past two months, disappointing data releases keep optimism alive about a shift in monetary policy in September. According to the CME's FedWatch tool, investors currently value the probability that the Fed will not change interest rates in September at 35%. Therefore, market positioning suggests that the US dollar faces two-way risk ahead of the release of inflation data.

Should the monthly core CPI increase by 0.4% or more, expectations of a maintenance of monetary policy in September could be revived. In this scenario, US Treasury yields are likely to gain traction and allow the dollar to gain strength against its major rivals. On the other hand, a reading of 0.2% or lower could have the opposite impact on the currency's valuation.

Eren Sengezer, chief analyst of the European session at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) on the daily chart remains above 50, but EUR/USD needs to convert the 1.0800-1.0820 zone, where the 200 and 100-day SMA are located, into support to extend its uptrend above this zone, 1.0900 (static level) could be seen as interim resistance before 1.0980 (March 8 high).”

“If EUR/USD fails to break above the 1.0800-1.0820 zone, buyers could become discouraged. In this case, supports could be seen at 1.0720 (20-day SMA) and 1.0600 (16-day low). April, static level).”