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This Week: What happens to the dollar if US CPI has peaked?

Inflation is coursing through the global economy, and market participants are growing increasingly fearful of the economic scenarios that lie ahead, ranging from stagflation to a recession. Such fears have prompted selloffs across various asset classes, from bonds to stocks, while the FX world has been at the mercy of King Dollar.

With inflation all the rage, the incoming US consumer price index is set to grab the market spotlight, amid these scheduled economic data releases and events in the coming week:

 

Monday, May 9

  • CNH: China April external trade
  • JPY: Bank of Japan releases March meeting minutes
     

Tuesday, May 10

  • AUD: Australia weekly consumer confidence, April household spending and business confidence, 1Q retail sales
  • EUR: Germany May ZEW survey expectations
  • USD: Fed speak – Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, New York Fed President John Williams, Fed Governor Christopher Waller, Minneapolis Fed President Neel Kashkari
     

Wednesday, May 11

  • AUD: Australia May consumer confidence
  • CNH: China April CPI, PPI, and FDI
  • USD: US April CPI (consumer price index), Atlanta Fed President Raphael Bostic speech
  • US crude: EIA weekly US crude inventories
     

Thursday, May 12

  • AUD: Australia May consumer inflation expectations
  • GBP: UK March and Q1 GDP, March industrial production
  • USD: US weekly initial jobless claims, San Francisco Fed President Mary Daly speech
     

Friday, May 13

  • EUR: Eurozone March industrial production
  • USD: US May consumer sentiment

 

Wall Street forecasts expect the headline CPI figure to moderate to 8.1% in April year-on-year, compared to the March print of 8.5%. If so, this would be the first print in a long time which on a year-on-year basis will be decelerating compared to the prior month. Although the FOMC targets the PCE figures rather than this release, these numbers are still important to monitor as one of the timelier gauges of price pressures at present.

Although many economists hope that inflation may now be past its peak, the fall back to target is set to be slow and protracted. Geopolitical tensions and China’s zero-Covid strategy remain and will continue to add pressure to supply chains. The tight labour market, as confirmed by Friday’s latest non-farm payrolls data, may also put upward pressure on wages. These labour costs are being passed onto customers so making for sticky inflation.

Dollar still underpinned

The dollar should remain well supported, although the pause in bullish momentum at long-term resistance is notable. In fact, with markets already pricing in the Fed funds target rate near the upper end of the neutral range of 3%, periods of major gains for the greenback may be harder going forward. That said, further sharp falls in equity markets will boost the buck's haven status.

This Week: What happens to the dollar if US CPI has peaked?

 

No love for sterling

A battered pound suffered a third week of sharp declines, losing over 6%. The UK GDP data is forecast to bounce to 8.9% year-on-year in the first quarter, compared to 4Q 2021’s 6.6%.

But this will mask softer performance in March, increasing concerns about slowing growth. Market pricing for rate hikes by the Bank of England still remain elevated, with around 75bps baked in for this year. The mid-1.22 support zone in cable has little below it, with round numbers offering psychological floors.

GBPUSD

 

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