Strategists at ING, including Francesco Pesole, Frantisek Taborsky, and Chris Turner, project a monthly rise of 0.9% in the United States Consumer Price Index (CPI) for April, surpassing the consensus forecast. They expect core inflation to register at 0.3% for the month, which may enhance the hawkish re-evaluation in the U.S. dollar (USD) curve. However, they caution that the dollar’s potential for growth will largely depend on equity market reactions and developments in U.S.-Iran negotiations, which they identify as an increasing medium-term support for the dollar.
As the anticipated CPI data is set for release today, ING’s analysts note that a 0.9% rise in the headline index would bring the year-over-year inflation rate to 4.0%, significantly exceeding the consensus expectations of 0.6% month-over-month and 3.7% year-over-year inflation. They align with the expected 0.3% month-over-month increase for core CPI at a year-over-year rate of 2.7%. The expected rise in headline CPI is primarily attributed to increases in gasoline and diesel prices, as well as rebounds in medical care and recreational expenses contributing to core inflation.
The analysts underline that while some early signs of second-round effects from inflation might not be apparent yet, a stronger-than-anticipated CPI reading could bolster the recent hawkish re-pricing of the USD swap curve, which reflects an expectation of tighter policies from the Federal Reserve. Currently, the curve indicates a tightening of 7 basis points by the end of the year.
In terms of the dollar’s trajectory, the analysts remark that its performance may be more closely linked to equity market trends than to interest rate changes. They observe that the global risk sentiment remains a significant influence on currency movements, particularly against pairs such as EUR/USD. Recently, favorable days for the dollar have often coincided with declines in equity markets.
Moreover, the analysts stress that CPI developments might overshadow more critical news regarding U.S.-Iran relations. The gap between U.S. and Iranian positions on a nuclear deal continues to be significant, and despite recent tensions, markets seem hesitant to account for a worsening situation. This includes recent statements about a ceasefire being “on life support” and reports of military activities in the Persian Gulf region.
The continuation of this stalemate could present further upward risks for the USD, both in the short term and the longer term. The prolonged uncertainty surrounding global economic health is typically inversely related to the dollar’s strength, suggesting that an ongoing deadlock could bolster the currency as markets react to its implications for broader economic conditions.
