US CPI Preview: Inflation to Spike to 3-Year Highs above 4%?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 4.2% y/y headline inflation, 2.9% y/y core inflation
• With the Fed likely on hold through the summer, this month’s CPI report may not drive as much immediate market volatility as past releases.
• EUR/USD’s near-term bias remains to the downside as long as previous-support-turned-resistance at 1.1600 holds

When is the US CPI report?

The US CPI report for May will be released at 8:30ET (12:30 GMT) on Wednesday, June 10.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI at +0.5% m/m (4.2% y/y) and Core CPI at +0.3% m/m (2.9% y/y).

US CPI Forecast

In the wake of Friday’s third consecutive stronger-than-anticipated Non-Farm Payrolls report, 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, with many FOMC members starting to believe that interest rates may be set too low. Traders agree, with Fed Funds Futures markets currently pricing in a 70% chance that interest rates will be at least 25bps above the current 3.50-3.75% level by the end of the year, though no rate hikes are expected in the next couple months as new Chairman Kevin Warsh starts his tenure:

Source: CME FedWatch

With monetary policy seemingly in stasis for the near-term, 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 low 4% range this month.

US Dollar Technical Analysis – EUR/USD Daily Chart

Source: TradingView, StoneX

After spending three weeks consolidating in a historically tight 70-pip range, EUR/USD broke lower through 1.16 support on the back of Friday’s NFP report. The world’s most widely-traded currency pair dropped as low as 1.1500 yesterday before seeing a shallow (so far) recovery rally back to the mid-1.1500s.

Moving forward, the near-term bias on EUR/USD remains to the downside as long as previous-support-turned-resistance at 1.1600 holds, with potential for a drop toward 1.1400 Monday’s low at 1.1500 is broken.

A higher-than-expected inflation reading could pull forward expectations of an FOMC rate hike, weighing on the pair, while a more moderate reading would partially alleviate the Fed’s concerns about falling “behind the curve,” likely boosting EUR/USD back toward 1.1600 resistance.

-- 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