US CPI Preview: US Dollar on the back foot and poised to fall further

• The US Consumer Price Index is expected to have risen by 5.2% YoY in March.
• The Federal Reserve has adopted a dovish stance amid the banking crisis.
• The US Dollar heads into the CPI release with a weak tone and with room to extend its slide.

The United States will publish the March Consumer Price Index (CPI) on Wednesday, which is expected to have risen by  5.2% YoY after increasing 6% in February. The core reading, however, is foreseen at 5.6%, up from 5.5% previously. Inflation cooled down in February, although at a slower pace than anticipated.

Effects on Federal Reserve’s decision

Market players were speculating on the Federal Reserve (Fed) potentially resuming its aggressive monetary tightening earlier this year amid the CPI tripling Fed’s goal. However, a new player came to town: banks’ failures. Silicon Valley Bank and  Signature Bank failures were partly linked to the Fed’s decision to drain the financial system to control inflation. Fears arose globally, and Credit Suisse, the second-largest bank in Switzerland, faced massive withdrawals, leading to its collapse. Mid-March, UBS Group AG bought Credit Suisse with help from the government to prevent a steeper banking crisis.

Central banks were suddenly aware that monetary tightening was not only risking recessions. The Fed flipped to a more dovish stance and hiked its benchmark rate by modest 25 basis points (bps), anticipating one more 25 bps hike, before pausing. Rate cuts are foreseen in 2024, as the central bank plans to maintain rates high to cool inflation further.

So at this point, whether the March CPI comes better or worse than anticipated, it seems unlikely the Fed will change the magnitude of its rate hiking. Of course, a smaller-than-expected increase will be welcomed and trigger optimism, yet it is worth remembering the Fed’s favorite inflation measure is still the Core PCE Price Index and the effects of CPI on financial boards will likely be short-lived.

On the other hand, higher inflation data could boost concerns and end up favoring the US Dollar due to its safe-haven condition. Nevertheless, and as said before, the figures have little chances of having a long-lasting impact on financial markets.

Dollar Index Technical outlook

The  Dollar Index (DXY) hovers around 102.10, and the bearish trend is evident in the daily chart, meaning its reaction will likely be more relevant in the case the report triggers a US Dollar sell-off. In the mentioned time frame, moving averages gain downward traction above the current level, in line with the dominant trend. The 20 Simple Moving Average offers dynamic resistance at around 102.75, while the 100 SMA comes next at 103.70.  At the same time, technical indicators have resumed their declines after failing to overcome their midlines into positive ground.

The monthly low provides support at around 101.40, with a break below it sealing Dollar’s destiny and resulting in a test of the 100.00 threshold.