April 12 (Reuters) – The one-month downtrend in the U.S. dollar index has stalled since last week’s 101.40 low. Wednesday’s U.S. CPI data for March will likely determine if the trend continues or a short-term bottom is in place.
Federal Reserve officials have clearly indicated that incoming data will help determine when policy is “sufficiently restrictive” in battling inflation. New York Fed President John Williams said on Tuesday, “We have to be driven by the data”, which suggests Wednesday’s CPI will go a long way in shaping expectations forthe Fed’s May meeting.
The CME FedWatch Tool shows the market is pricing in around a 68% chance the Fed will hike by 25 basis points to 5.00-5.25% on May 3. That could change drastically if the CPI data is outside expectations.
Ifcore CPI comes in hotter than the 0.40% month-on-month and 5.6% year-on-year forecasts, the market may fully price in a 25 bps hike in May. This will likely push the two-year Treasury yield back to the March 31 high at 4.172% and send the USD index =USD above the 21-day moving average at 102.69, ending the short-term trend lower.
A softer-than-expected result could convince the market the Fed will pause or at least signal the terminal rate is close at hand if they hike. This would likely invigorate USD bears, leading to a test of the 101.40 April low and put the 2023 100.80 trend low on the market’s radar.
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(John Noonan is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)
((john.noonan@thomsonreuters.com;))
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