Alert, dollar dealers!
We have a fresh batch of US CPI readings coming, so this could be your chance to catch big moves from the USD pairs.
Focus on the event:
Headline and core readings of the US CPI for May 2023
When will it be released:
June 13, 2023 (Tuesday), 12:30 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- US headline consumer price index m/m: expect 0.2% vs. 0.4% previously
- The main consumer price index in the United States on an annual basisExpectation: 4.1% vs. 4.9% previously
- US Core Consumer Price Index m/m: expect 0.4% vs. 0.4% previously
Related data since the last data event/release:
- Core PCE Price Index It rose from 0.3% to 0.4% month-over-month in May versus estimates of 0.3%.
- April ISM Services PMI The price index fell 3.4 points to 56.2, reflecting a slowing pace of increase
- April ISM Manufacturing PMI The price index decreased by 9 points from 53.2 to 44.2 to indicate a shift from rising to falling prices.
- S&P Global Composite PMI He revealed that “manufacturers recorded a decrease in input prices for the first time in three years,” while “services recorded a rise in costs, but with” the rate of increase falling to the slowest for five months.
- Average hourly earnings It increased by 0.3% in May, down from the previous increase of 0.4%.
Previous issues and the impact of the risk environment on the US dollar
May 10, 2023
Event Results/Price Action:
Core monthly CPI came in in line with expectations with an increase of 0.4% for the month of April, faster than the previous rise of 0.1%, while core CPI came in higher than expected at 0.4% mom.
However, the annual CPI reading fell from 5.0% to 4.9% year-on-year versus estimates of 5.0%, marking the smallest 12-month increase since April 2021.
The dollar bulls were already on the alert at the start of the week, as traders prepared for the release of the US CPI. The sell-off got worse after seeing weak inflation data as this reinforced expectations of a Fed pause for upcoming meetings or even interest rate cuts for next year.
Risk Environment and Internal Market Behaviors:
Uncertainty persisted in US markets after debt ceiling talks were postponed the previous week, adding to negative pressure on an already stressed dollar.
It didn’t help that market players were still skeptical that the FOMC wasn’t committed to stopping the tightening cycle anytime soon, so the unimpressive CPI readings only added to the pessimistic outlook again.
Fortunately for the dollar, it was able to build on its safe-haven appeal before the week ended, as the spotlight shifted to global recession fears thanks to weak Chinese data.
April 12, 2023
USD Pairs Overlay: 1-Hour Forex Planned by TV
Event Results/Price Action:
Core CPI slowed from 0.4% m/m in February to a small gain of 0.1% in March, bringing the annual rate down from 6.0% to 5.0%.
Although core CPI accelerated from 0.4% on a monthly basis to 0.5% in March, the dollar fell against most of its peers during the release.
Around this time in April, dollar traders were already buzzing about the possibility of the Fed tightening the pause as early as May or June. The decrease in price pressures has probably boosted the odds of not seeing any change in interest rates at the upcoming FOMC meetings.
Risk Environment and Internal Market Behaviors:
Traders were already hungry for more risk early in the week, which led to a general move lower in yields and the US dollar even before the release of the CPI and FOMC meeting minutes.
Weaker-than-expected inflation data accelerated the dollar’s decline and served as a backdrop to the Fed’s relatively dovish minutes, as policymakers highlighted expectations of a mild recession and risks from the banking sector.
Until the end of the week, the dollar did not manage to pull back from its decline, perhaps due to profit-taking or a slight rise in risk appetite.
Price action odds:
Possibilities of feeling risky:
Expectations of a one-time Fed rate hike this month have been revived after the May non-farm payrolls report once again beat market expectations. However, traders will likely adjust their biases once the latest batch of CPI readings are printed.
The dollar also managed to regain its footing when the US debt ceiling problem was resolved two weeks ago, and it appears that the risks in the banking sector have also dissipated.
US dollar scenarios:
Possible base scenario:
The upcoming CPI report may be the final, crucial piece in the puzzle of the Fed’s pause before the central bank holds another policy meeting the next day.
Major indicators mostly point to yet another sharp slowdown in inflationary pressures, which could reinforce the view that the FOMC may be sitting on its own.
If that happens, the dollar could pull back from previous relief gains that were triggered by the easing of debt ceiling concerns and bank liquidity problems.
In this scenario, look for opportunities to sell the US dollar against currencies with relatively hawkish central banks such as the Australian dollar, the Canadian dollar, and the euro.
Possible alternative scenario:
A surprise bullish CPI could bolster expectations of a Fed rate hike in June, which could translate into another rally for the US currency.
Keep in mind that a handful of policymakers have expressed their inclination to continue to push for further tightening to ensure inflation eventually falls back to their target.
In this case, stay alert to the opportunity to buy the dollar against its forex rivals as central banks shift to a less hawkish stance such as the New Zealand dollar.
