Gather ’round, dollar traders!
We’ve got the U.S. CPI readings lined up this week, so this might be your chance to catch big moves off USD pairs.
Event in Focus:
U.S. headline and core CPI readings for April 2023
When Will it Be Released:
May 10, 2023 (Wednesday), 12:30 pm GMT
Expectations:
U.S. headline consumer price index m/m: 0.4% forecast vs. 0.1% previous
U.S. headline consumer price index y/y: 5.0% forecast vs. 5.0% previous
U.S. core consumer price index m/m: 0.3% forecast vs. 0.4% previous
Relevant Data Since Last Event/Data Release:
- April ISM services PMI prices index was up by 0.1 to 59.6 to reflect a faster pace of increase
- April ISM manufacturing PMI prices index rose 4 points from 49.2 in March to 53.2
- WTI crude oil prices surged to a high of $83.41 per barrel in mid-April
Previous Releases and Risk Environment Influence on the U.S. Dollar
April 12, 2023
Overlay of USD Pairs: 15-min Forex Charts by TV
Event results / Price Action:
Headline inflation slowed from 0.4% month-over-month in February to just a meager 0.1% uptick in March, bringing the year-over-year rate down from 6.0% to 5.0%. The core CPI accelerated from 0.4% month-over-month to a 0.5% gain in March.
Still, the Greenback slid lower against most of its peers during the release, as dollar traders are already starting to price in the possibility that the Fed would hint at a tightening pause soon.
Risk environment and intermarket behaviors:
Risk-on flows were in play early in the week, triggering a broad move lower for bond yields and the U.S. dollar ahead of the CPI release and FOMC minutes.
The downbeat CPI provided a backdrop for a relatively dovish minutes, as some policymakers talked about expectations for a mild recession this year, as well as their inclination to pause hiking due to banking sector jitters.
March 14, 2023
Overlay of USD Pairs: 1-Hour Forex Chart
Event results / Price Action:
The U.S. CPI for February came in line with expectations of a 0.4% month-over-month uptick, translating to a 6% annual headline reading. The core version of the report was slightly above forecast at 0.5% month-over-month versus the 0.4% consensus.
The Greenback barely reacted to the report, continuing its sideways price action against its forex counterparts while traders braced for other top-tier releases like retail sales data.
Risk environment and intermarket behaviors:
Market volatility spiked early in the week, as traders were still reacting to the SVB shakeup and the government’s coordinated effort to keep a liquidity crisis contained. Also, the prospect of the Fed toning down its hawkish bias on account of banking sector risks kept dollar rallies limited.
Price action probabilities:
Risk sentiment probabilities:
Risk assets are starting this week on a strong note, which could spell some downside for the safe-haven U.S. dollar if this kind of sentiment keeps up.
However, last Friday’s upbeat NFP release might still be enough to keep dollar bulls charging, especially since the Fed recently refrained from hinting at a pause anytime soon.
U.S. Dollar scenarios:
Potential Base Scenario:
Based on the previous releases, dollar traders might save their big reactions for any major upside or downside surprises.
In particular, a strong upside surprise could keep bulls hopeful that the Fed will push through with more tightening moves in the coming months, likely triggering a wave higher for the U.S. currency and Treasury yields.
If this happens, the U.S. dollar might enjoy another leg higher against the Japanese yen and other currencies with relatively dovish central banks.
Potential Alternative Scenario:
A dismal CPI reading could remind traders that the U.S. economy is already grappling with the possibility of a recession, a banking sector crisis, and debt ceiling woes.
This could highlight the divergence between monetary policy biases, particularly against the likes of the ECB and RBNZ that have expressed willingness to keep tightening in order to ward off persistent inflationary pressures.
In this case, look out for opportunities to catch a long position on NZD/USD if risk appetite stays in play or keep an eye out for a chance to buy EUR/USD if risk-off flows return.
