Breaking: US annual CPI data decreases to 5% in March vs. 5.2% expected

The US Bureau of Labor Statistics reported on Wednesday that inflation in the United States, as measured by the Consumer Price Index (CPI), declined to 5% on a yearly basis in March from 6% in February. This reading came in below the market expectation of 5.2% and it was the lowest since May 2021. 

The annual Core CPI, which excludes volatile food and energy prices, edged higher to 5.6% as expected with a monthly increase of 0.4%. 

“The index for shelter was by far the largest contributor to the monthly all items increase. This more than offset a decline in the energy index, which decreased 3.5 percent over the month as all major energy component indexes declined. The food index was unchanged in March with the food at home index falling 0.3 percent”, said the BLS. 

Follow our live coverage of US inflation report and the market reaction.

Market reaction

The US Dollar came under heavy selling pressure with the initial reaction to soft inflation report. As of writing, the US Dollar Index was down 0.55% on a daily basis at 101.60.

Meanwhile, the benchmark 10-year US Treasury bond yield broke below 3.4% and fell nearly 2% following the CPI readings. According to the CME Group's FedWatch Tool, the probability of one more 25 basis points Federal Reserve (Fed) rate hike currently sits at 63%, down from 73% on Tuesday. 

Inflation data seem to be providing a boost to risk sentiment mid-week. Ahead of Wall Street's opening bell, US stock index futures are up between 0.7% and 1%.

Commenting on the market reaction to the CPI data, "the wait-and-see stance was broken with US March CPI, as it rose at an annualized pace of 5%, better than the 5.2% expected", said FXStreet Analyst Valeria Bednarik.

"The core annual reading met expectations and was up by 5.6%. Finally, inflation was up by 0.1% MoM, below the 0.3% expected," Bednarik added. "The US Dollar plummeted, and EUR/USD soared to 1.0989, its highest since early February, as the news means no innovation from the Federal Reserve (Fed). Stock markets are on the run, while government bond yields retreat sharply, particularly those and the nearer end of the curve."

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• Annualized Consumer Price Index in the US is expected to decline to 5.2% in March.
• Core CPI is forecast to edge higher to 5.6% YoY in March from February’s 5.5%.
• US CPI could influence Fed’s rate outlook and impact US Dollar’s valuation in a significant way.

The Consumer Price Index (CPI) data release for March, published by the US Bureau of Labor Statistics (BLS), is scheduled for April 12 at 12:30 GMT. The US Dollar (USD) has been struggling to gather bullish momentum despite having outperformed its major rivals for a couple of days following the upbeat March jobs report. Markets are still undecided regarding the Federal Reserve’s (Fed) next policy action and inflation developments could provide fresh clues.

What to expect in the next CPI data report?

On an annualized basis, the Consumer Price Index data is forecast to decline to 5.2% and the Core CPI, which excludes volatile food and energy prices, is expected to edge a tad higher to 5.6% from 5.5% registered in February.

Meanwhile, the headline CPI data is seen rising 0.3% MoM in February, compared with a 0.4% increase reported in February. Similarly, the Core CPI is projected to increase by 0.4% in the same period, down slightly from 0.5% previously. 

The US CPI data will hold the utmost relevance, as the Federal Reserve tries to figure out whether another rate hike will be needed to bring inflation back down to the 2% target. Renewed concerns over the negative impact of rising interest rates on financial stability following the collapse of Silicon Valley Bank forced the Fed to adopt a cautious stance at its last policy meeting on March 22. The Fed hiked its policy rate by 25 basis points (bps) to the range of 4.75%-5% as expected but noted that tighter credit conditions are expected to weigh on economic activity, hiring and inflation.  

Economists at Commerzbank see the potential for an extended recovery in the US Dollar:

“A relatively more restrictive Fed with an accompanying fall in inflation would be ideal. Let us not forget: in itself, a fall in inflation (i.e. a reduced erosion of the Dollar’s domestic purchasing power) is a positive argument for the currency involved. Only a negative rate outlook might affect this image or might even reverse the situation. If that does not arise this is the best imaginable situation for USD bulls.”

When is the Consumer Price Index report and how could it affect EUR/USD?

The Consumer Price Index data report is scheduled for release at 12:30 GMT, on April 12. A softer-than-expected reading, especially in the monthly core inflation, could revive expectations for the Fed to keep its policy rate unchanged at the upcoming meeting. 

While speaking at the post-meeting press conference in March, Federal Reserve Chief Jerome Powell said that the story on disinflation was intact. Although Powell also reiterated that they are not yet seeing progress on core services inflation ex-housing, he acknowledged that they need to be alert when thinking about further rate hikes given the potential impact of credit tightening on the economy.

On the other hand, the March jobs report revealed that Nonfarm Payrolls rose by 236,000 in March, slightly below the market expectation of 240,000. Additionally, the Unemployment Rate edged lower to 3.5% while the annual wage inflation, as measured by the Average Hourly Earnings, edged lower to 4.2% from 4.6%. One could argue that the US labor market remains relatively healthy but there are signs of softening. Hence, March CPI data could help investors decide if they should bet on one more Fed rate increase. According to the CME Group FedWatch Tool, the probability of a 25 bps rate hike currently sits at around 70%.

In case of a disappointing CPI print, the US Dollar will likely see a fresh leg lower, allowing the EUR/USD pair to regather bullish momentum. Conversely, a surprisingly hotter US CPI reading is likely to reaffirm another 25 bps Fed hike and provide a boost to the USD, forcing EUR/USD to turn south. 

FXStreet Analyst Eren Sengezer offers a brief technical outlook for the major and explains: “EUR/USD’s bullish bias stays intact in the near term as the 20-day Simple Moving Average (SMA) continues to pull away from the 50-day SMA following the bullish cross seen in early April. Furthermore, the Relative Strength Index (RSI) indicator on the daily chart holds comfortably above 50, highlighting the lack of seller interest.

Eren also outlines important technical levels for the EUR/USD pair: “On the upside, interim resistance seems to have formed at 1.0950/60 area. Once the pair clears that levels and confirms it as support, 1.1000 (psychological level) aligns as the next bullish target before 1.1035 (2023 high) and 1.1100 (psychological level, static level). On the downside, a daily close below 1.0800 (20-day SMA) could ramp up the bearish pressure and open the door for an extended slide toward 1.0740 (50-day SMA) and 1.0700 (100-day SMA).”

CPI data related content

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