Implications of the US inflation figures – Commerzbank

The US Dollar (USD) depreciated significantly yesterday following the weaker-than-expected US inflation data. At first glance, this may seem logical. After all, subdued inflationary pressure favours potentially faster interest rate cuts by the Fed. However, the reaction was anything but trivial. One could just as well argue that the risks of stagflation have diminished, which would be positive for the dollar, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

FX market react to the US CPI figures with USD weakness

"However, the fact that the FX market reacted to the figures with dollar weakness could also be due to something else: The US president is likely to feel vindicated by the result. And this does not mean the - admittedly significantly lower - egg prices, but above all the lack of a tariff effect in the April price data, which may have surprised some. Of course, explanations can be found: Sufficient inventory, for example, which allow companies to delay price increases. However, the fact is that so far there has been little sign of the horrendous price increases that were feared. This is good news for those in favour of a tough US tariff strategy, as it reduces the pressure on the US government to withdraw tariffs as quickly as possible and present ‘deals’ with trading partners."

"On the other hand, however, the inflation figures also show that the impact of the tariffs could be more difficult to assess than expected. This does not make things any easier for the US Federal Reserve and may suggest that it is more likely to hold off on a possible interest rate cut. Even if the recent agreement between the US and Chinese governments on a significant reduction in reciprocal tariffs has reduced the price risks, there is likely to be agreement that a tariff of 30% on imports from China still has a significant inflationary effect."

"This could be all the more the case as Fed Chairman Jay Powell is under fire from US President Trump. The latter could not resist lashing out at Powell on his favourite social media channel yesterday after the inflation figures. If only to underpin the independence of the US central bank, it could be worthwhile for the Fed to continue to reject hopes of rapid interest rate cuts. After all, inflation has not fallen massively short of expectations (0.2% instead of 0.3% compared to the previous month according to the Bloomberg survey). Perhaps we shouldn't get carried away?"