EUR, GBP, JPY, AUD all up against the USD following mixed CPI data

All the major currencies were up against the US dollar following the latest CPI release. But the underlying data may wrongfoot the market in the weeks ahead.

The latest US Consumer Price Index (CPI) data released on 12^th April showed mixed fortunes. Headline inflation came in lower than the market expected, at 5% vs 5.2%. But core inflation remained stubbornly high, with housing costs continuing to accelerate.

In the immediate aftermath of the CPI release, stocks rose, and the USD weakened against all its major peers as markets adopted a glass-half-full attitude. But the dissonance between market expectations and the noises coming from the Fed is becoming harder and harder to ignore.

Speaking just after the release of the consumer price data, Richmond Fed President Tom Barkin told CNBC that “there is still more to do to get core inflation back down to where we'd like it to be”, adding that it is hard to make the case that inflation is headed to the Fed’s target of 2%.

Almost simultaneously, Goldman Sachs announced that they no longer priced in a 25 bps rise in interest rates in June, believing that the Fed will raise rates once more in May and then hold. Most market analysts are also pricing in a rate cut before the end of the year.

Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, made the problem clear:

“Today's inflation data is confirmation that inflation trends are moving forward. But from the market's perspective, it might be getting ahead of itself because I don't think the Fed will be cutting rates this year. At some point, investors are going to have to grapple with the idea that rates are going to stay higher for longer this year, and that could create some tension for stocks down the road.”

That tension was on display almost immediately, as the Dow Jones – up over 200 points following the CPI release – erased most of its gains within a couple of hours.

The tension will also be felt in the Forex markets, and it’s something that traders will need to watch for in the medium term as market expectations and monetary policy potentially drift apart.

In the shorter term, traders will look to the German Final YoY Inflation Rate, which is due on Thursday, 13^th April, for signs of continued support for the EUR – though some of the fundamentals coming out of the Eurozone are pointing to a possible change in ECB’s hawkish stance.

In the meantime, it’s the same pattern we have seen over the last few weeks. A cooling US economy and an uncertain Federal Reserve pushing the USD down as markets, rightly or wrongly, see an end in sight to monetary tightening.