CPI Squashes June Rate Cut Hopes

The US Dollar has moved firmly higher on the back of yesterday’s March inflation reading. Annualised headline CPI was seen rising to 3.5% from 3.2% prior, above the 3.4% the market was looking for. With inflation proving entrenched above the 3%, traders have quickly scaled back their expectations for a June rate cut, leading USD sharply higher.  We’ve seen a firm reaction across the board with risk currencies recoiling as USD pushes higher. Gold and other commodities, as well as stock indices, have also come under pressure while crypto appears to be holding up reasonably well so far.

Inflation Rising Further Above 3%

Yesterday’s data marks the third consecutive month of CPI coming in above forecasts and holding above the 3% level. While this situation persists, rate cut expectations are being pushed further out into the year with September now pegged as the lift off point for easing. If inflation continues to hold around current levels, however, we could well see rates projections for the remainder of the year changing significantly with the Fed likely to alter its forecast from 3 rate cuts down to 2 or less.

FOMC Minutes Add to USD Rally

USD bears were hit with a double-whammy yesterday as the FOMC minutes amplified the case for USD buying. The minute showed that policymakers felt they needed more evidence on inflation heading back to target before putting confidence in a cut. Set now against yet a further lift in inflation, the case for near-term rate-cuts looks very weak. Looking ahead today traders will be watching US PPI next, likely to add further fuel to the USD rally.

Technical Views

DXY

Following the rally yesterday, the DXY is now testing above the 104.95 level, hitting its highest mark since November last year. While above this level and with momentum studies bullish, the focus is on a continuation higher with 107.04 the next target for bulls.