Heads up, dollar traders!
We’ve got a fresh batch of U.S. CPI readings comin’ right up, so this might be your chance to catch big moves off USD pairs.
Event in Focus:
U.S. headline and core CPI readings for May 2023
When Will it Be Released:
June 13, 2023 (Tuesday), 12:30 pm GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
- U.S. headline consumer price index m/m: 0.2% forecast vs. 0.4% previous
- U.S. headline consumer price index y/y: 4.1% forecast vs. 4.9% previous
- U.S. core consumer price index m/m: 0.4% forecast vs. 0.4% previous
Relevant Data Since Last Event/Data Release:
- Core PCE price index rose from 0.3% to 0.4% month-over-month in May vs. 0.3% estimate
- April ISM services PMI prices index was down 3.4 points to 56.2, reflecting a slower pace of increase
- April ISM manufacturing PMI prices index was down 9 points from 53.2 to 44.2 to signal a shift from rising to declining prices
- S&P Global Composite PMI revealed that “manufacturers recorded a fall in input prices for the first time in three years” while “services reported higher costs but with “the rate of increase softening to the slowest for five months.”
- Average hourly earnings posted a 0.3% uptick in May, lower than the earlier 0.4% increase
Previous Releases and Risk Environment Influence on the U.S. Dollar
May 10, 2023
Event results / Price Action:
Headline monthly CPI came in line with expectations of a 0.4% increase for April, faster than the earlier 0.1% uptick, while core CPI posted a higher than expected 0.4% month-over-month gain.
However, the annual CPI reading dipped from 5.0% to 4.9% year-over-year versus estimates of a 5.0% reading, marking the smallest 12-month increase since April 2021.
Dollar bulls were already on edge at the beginning of the week, as traders braced for the U.S. CPI release. The selloff worsened upon seeing softer inflation data since these reinforced expectations of a Fed pause for the next meetings or even rate cuts for next year.
Risk environment and intermarket behaviors:
Uncertainty lingered over the U.S. markets after debt ceiling talks were postponed in the previous week, adding downside pressure on the already jittery dollar.
It didn’t help that market players were still doubtful that the FOMC isn’t committed to pausing their tightening cycle anytime soon, so the not-so-impressive CPI readings ramped up dovish expectations once more.
Fortunately for the dollar, it was able to bank on its safe-haven appeal before the week came to a close, as the spotlight moved to fears of a global recession thanks to weak Chinese data.
April 12, 2023
Overlay of USD Pairs: 1-Hour Forex Chart by TV
Event results / Price Action:
The headline CPI slowed from a 0.4% month-over-month gain in February to just a meager 0.1% uptick in March, bringing the year-over-year rate tumbling down from 6.0% to 5.0%.
Even though the core CPI accelerated from 0.4% month-over-month to a 0.5% gain in March, the dollar slid lower against most of its peers during the release.
Around this time in April, dollar traders had already been buzzing about the possibility of a Fed tightening pause as early as May or June. The drop in price pressures likely boosted the odds of seeing no change in interest rates in the next FOMC meetings.
Risk environment and intermarket behaviors:
Traders were already hungry for more risk early in the week, leading to a general move lower for bond yields and the U.S. dollar even before the CPI release and FOMC minutes.
Weaker than expected inflation data accelerated the dollar’s decline and served as a backdrop for the relatively dovish Fed meeting minutes, as policymakers highlighted expectations for a mild recession and risks from the banking sector.
It wasn’t until the very end of the week that the dollar managed to pull up from its slide, possibly on profit-taking or a slight pickup in risk-taking.
Price action probabilities:
Risk sentiment probabilities:
Expectations for one last Fed rate hike this month were revived after the May NFP report beat market expectations yet again. Still, traders are likely to adjust their biases once the latest batch of CPI readings are printed.
The dollar has also been able to regain its footing when the U.S. debt ceiling issue was resolved a couple of weeks back, and banking sector risks appear to have faded as well.
U.S. Dollar scenarios:
Potential Base Scenario:
The upcoming CPI report might be the final crucial piece of the Fed pause puzzle before the central bank holds another policy meeting the very next day.
Leading indicators are mostly pointing to another sharp slowdown in inflationary pressures, possibly reinforcing the view that the FOMC might sit on its hands.
If that happens, the Greenback could retreat from earlier relief rallies that stemmed from easing debt ceiling concerns and banking liquidity troubles.
In this scenario, look for opportunities to short USD against currencies with relatively hawkish central banks like AUD, CAD, and EUR.
Potential Alternative Scenario:
An upside CPI surprise could bolster expectations for a Fed rate hike this June, which could translate to another leg higher for the U.S. currency.
Keep in mind that a handful of policymakers have expressed their inclination to keep pushing for more tightening efforts to ensure that inflation eventually falls back to their target.
In this case, stay on the lookout for a chance to buy the dollar against forex rivals with central banks shifting to a less hawkish stance like NZD.
