US CPI Preview: Inflation Poised to Surge Toward 4% Amid Iran Conflict

US CPI KEY TAKEAWAYS:

• US CPI expectations: 3.7% y/y headline inflation, 2.7% y/y core inflation
• With the Fed likely on hold until the fall, this month’s CPI report may not drive as much immediate market volatility as past releases.
• USD/JPY’s is in a near-term 200-pip consolidation range between 156.00 and 158.00, albeit with longer-term fundamental factors pointing to continued upside ahead of CPI

When is the US CPI report?

The US CPI report for April will be released at 8:30ET (12:30 GMT) on Tuesday, May 12.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI at +0.6% m/m (3.7% y/y) and Core CPI at +0.4% m/m (2.7% y/y). These readings, if seen, would represent accelerating price pressures over the last month, when headline consumer inflation was 2.6%, 3.3% on a core basis.

US CPI Forecast

After another solid, if unremarkable, jobs report last week, traders now turn their attention to the other half of the Federal Reserve’s dual mandate, inflation. In the current environment, with the Strait of Hormuz in the midst of a seemingly never-ending closure, price pressures are a bigger concern for the central bank, though most FOMC members believe interest rates are current set at an appropriate level. Traders agree, with Fed Funds Futures markets currently pricing in a 3-in-4 chance that interest rates will be at the same 3.50-3.75% level at the end of the year, and roughly balanced odds of a small tweak higher and lower:

Source: CME FedWatch

With monetary policy seemingly in stasis for the near-term even with new Chairman Warsh expected to lean toward rate cuts, this month’s CPI report may not drive as much immediate volatility as it has when the Fed’s interest rate expectations have been more in flux.

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As we noted above, has remained stubbornly above the Fed’s 2% target for a half-decade already, and leading indicators are suggesting it could rise further from here:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports have surged higher in recent months, setting the stage for a potential “catch up” in realized inflation readings toward the mid-3% range this month.

US Dollar Technical Analysis – USD/JPY 4-Hour Chart

Source: TradingView, StoneX

USD/JPY is in focus ahead of the CPI report as it’s the pair that typically sees the “cleanest” reaction to US economic data. Despite numerous interventions into the market by the Ministry of Finance and Bank of Japan, bulls continue to support the pair on any dips below 156.00, whereas Japanese authorities are seemingly trying to draw a red line below the 158.00 area.

Technically speaking, the pair is in a near-term 200-pip consolidation range between those levels, albeit with longer-term fundamental factors pointing to continued upside as long as the conflict in the Middle East remains unresolved. A hotter-than-expected CPI report could take USD/JPY back toward 158.00, where the risk of further intervention grows, whereas a soft inflation reading could weigh on the pair and prompt a retest of support just below 156.00.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX