US CPI to influence Fed hike bets

Markets are set to use the incoming US inflation print to predict the likelihood of a Fed rate hike in May, which investors are betting will likely be the last in this cycle.

At the time of writing, Fed funds futures point to a 71% chance of another 25-basis point rate hike at next month’s FOMC meeting, reverting to expectations held prior to the recent banking turmoil and SVB’s collapse.

A headline CPI print that’s higher than the forecast 5.1% year-on-year figure should shore up support for the US dollar in the lead up to next May’s rate decision. Fresh evidence of stubbornly high US core inflation may also keep gold prices subdued in sub-$2k territory while limiting the upside for US equities.

However, if US disinflation is shown to be gathering pace as price pressures fall more sharply than expected, that may offer further upside impetus for the precious metal and risk assets, while undermining the dollar’s rebound from the past week.

Ultimately, the CPI print will be used to validate the recent rhetoric by Fed officials who are still focused on restoring price stability, even as such attempts have been made more complicated by a still-tight labour market as well as the unexpected OPEC+ crude oil supply cuts.