Will the US CPI data clarify the Fed rate path?

Dollar falls despite strong headline NFP print.
US-Iran stalemate revives inflation concerns.
Investors assign a 45% chance of a 2027 Fed rate hike.
US CPI data (Tuesday at 12:30 GMT) key for dollar and Fed direction.

Charalampos Pissouros XM

US jobs report: Not as shiny as headline numbers suggest

The US dollar traded on the back foot against its major counterparts on Friday, staying week even after the US jobs report revealed a much-stronger-than-expected headline NFP figure.

Investors remained concerned about the labor market not coming out of the woods yet as the number of people working part-time for economic reasons increased the most in 14 months and household employment decreased for a fourth straight month. Although the unemployment rate held steady at 4.3%, this was due to a shrinking labor force.

What’s more, average hourly earnings increased by less than expected, suggesting that, although the state of the economy does not warrant rate cuts, there is no imminent need for a rate hike either. The probability for a 25bps increase by April next year dropped after the report, thereby dragging Treasury yields and the US dollar lower.

Geopolitics keep Fed rate hike bets on the table

Having said all that though, the greenback opened with a positive gap this week as US President Trump said that Iran’s response to the US peace proposal was “totally unacceptable.” Iran demanded sanctions relief, the right to limited nuclear activity and the removal of US navy around the Strait of Hormuz. Nonetheless, the greenback was quick to give back its gap-related gains.

Oil prices also rallied on speculation that it may be very hard for the strait to reopen, reviving fears of stickier than expected inflation down the road, and pushing the probability of a Fed rate hike by April 2027 up to 45%.

Elevated Oil prices to push US inflation higher

With all that in mind, this week, dollar traders are likely to pay extra attention to the US CPI data for April, due out on Tuesday. Expectations are for the headline rate to have risen to 3.7% y/y from 3.3% in March after jumping from February’s 2.4%. The core rate is forecast to have ticked up to 2.7% from 2.6%. The y/y rate of change in oil prices continued to rise in April, corroborating the notion that headline inflation may have accelerated more than underlying price pressures.

Therefore, an inflation rate that is nearly double the Fed’s objective of 2% could push the probability of a Fed rate hike at some point next year higher and thereby add some further support in the US dollar, especially if the US and Iran continue struggling to find a solid and permanent deal and end the war.

Euro/Dollar trades in neutral state

From a technical perspective, euro/dollar remained supported above 1.1740, but it is still trading below the key resistance zone of 1.1830. Overall, the price remains above all three of the plotted (50-, 100-, and 200-day) exponential moving averages (EMAs), which keeps the door to further advances wide open.

For the outlook to change to bearish, a set of hot CPI numbers would have to push the action below 1.1670. Such a change in sentiment target the 1.1630 barrier, the break of which could pave the way towards the 1.1505 zone. On the upside, a reach and breach of the 1.1830 resistance may encourage the bulls to climb towards the 1.1920 territory.

Author

Charalampos Pissouros

Charalampos joined Trading Point in August 2022 as a senior market analyst. He has extensive experience in analyzing financial markets, gained through a decade-long career, with his primary focus being on the currency market.

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