US CPI Quick Analysis: Dark clouds cover peak inflation, King Dollar to dominate

No peak in sight – inflation continues climbing higher, especially the type that matters to the Federal Reserve and markets. High uncertainty hamstrings markets but propels the dollar higher after a brief interlude. 

President Joe Biden may say that the drop in headline annual inflation from 8.5% to 8.3% is a positive sign – especially as it is backed by some stability in gasoline costs. While the price at the pump remains sensitive, investors care about the Core Consumer Price Index (Core CPI). The Fed has limited impact on global oil prices and war-related spikes in food costs. However, it can cool demand for everything else by raising interest rates.

The rise of 0.6% MoM in Core CPI is dramatically higher than the 0.4% projected. When every tenth of a percentage matters, a surprise of two-tenths is already significant for the initial reaction. I think there is more in store, as it may trigger more hawkish comments from Fed officials.

Hawks at the world's most powerful central bank may reopen the door to triple-dose rate hikes – 75 bps. While Chair Jerome Powell signaled 50 bps move in the next two meetings, he may want to reconsider his stance. When the data changes, guidance may change as well. 

Will a 75 bps move happen already in June? Markets are beginning to price higher chances of such an outcome. Even if the Fed holds back for one month, it could act in the following meeting in July– or at least refuse to rule out such a move. 

Any change in expectations, driven by the data or by consequent comments, could boost the dollar. I would single out the pound as a more sensitive currency, as the Bank of England has already raised rates four times and seems reluctant to tighten further. On the other hand, I see the euro as holding up well – hawks in Europe may be emboldened by inflation in America. They have yet to receive their first increase of borrowing costs. 

Overall, the dollar's advance is set to continue.