Dollar under pressure ahead of the US CPI release

Dollar remains on the back foot 

The countdown to the 12:30 GMT release of the April US CPI report is almost over. Market forecasts point to a monthly change of 0.4% for the headline CPI, pushing the annual growth rate down to 3.4%. Similarly, the core indicator which excludes energy and food prices is seen easing to 0.3% and 3.6% on a month-on-month and an annual basis respectively. 

Equities to enjoy a downside surprise

Confirmation of market forecasts might cause a small upleg in equities, but the reaction will most likely be relatively muted. However, equities will most likely react more forcefully if today’s CPI report shows a significant easing in inflationary pressures. In this case, the US 500 cash could overcome its recent high, and possibly rise comfortably above the 5,300 level. Similarly, euro/dollar could test its April highs as the possibility of a summer rate cut by the Fed gains ground.

Smaller market reaction upon an upside surprise

Last month, the upside surprise at the CPI report boosted the US dollar across the board, but caused a negative reaction in US stocks. Another upside surprise today might not cause a similarly-sized reaction as the market appears convinced that the Fed is unlikely to consider rate hikes at this juncture. 

That was the message from the May 1 Fed meeting which Chairman Powell repeated yesterday. At the same time though, Powell reiterated that the first quarter of 2024 showed a lack of further progress on inflation, supporting the current market expectations for a rate cut towards the latter end of 2024.

Fed’s Kashkari could cause volatility

There are three Fed speakers on the wires today but the focus will be on the Minneapolis Fed President Kashkari. He does not vote in 2024 but he is perceived to be the arch-hawk of the FOMC. Hence, any indications of a softer message from Kashkari could be seen as an early precursor of a rate cut. 

Housing QE from China?

Expectations for further measures from the Chinese government are likely to be confirmed following reports that the authorities are preparing to buy millions of unsold homes. Details are still being discussed with the key question being the actual investment needed for such a plan and the funding sources. A housing-QE plan could amount to as much as one trillion dollars according to some estimates and take months to be fully implemented. However, discussions of such a plan show that the Chinese government is ready to spend again in order to stop the housing sector from going down the drain.

Aussie benefits

The aussie is trading higher again today against the dollar on the back of the positive newsflow from China. Domestically, the key wages price index for the first quarter of 2024 printed a tad below expectations at 0.9% quarter-on-quarter and 4.1% yoy respectively. However, it still remains at levels that justify the current market pricing of no changes at the RBA cash rate during 2024.