US CPI Preview: A turn to the downside in the dollar is the most likely scenario

US inflation figures for March are critical for markets and expectations are high – probably too high. The dollar could drop if reality does not meet estimates, Yohay Elam, an Analyst at FXStreet, informs.  

Three scenarios for the critical event

“If Core CPI hits 1.6% YoY as projected – or even 1.7% – that would merely be within what economists expected but below the hype-driven market expectations. In this scenario, which has the highest probability, the greenback could suffer in a classic ‘buy the rumor, sell the fact’ response. The pound could stand out, after correcting to the downside and as the country is reopening amid an accelerated vaccination campaign.”

“In case Core CPI hits 1.8% and especially if it touches 2%, the greenback would gain amid growing chances that the Fed raises rates or at least tapers down bond-buys sooner. This scenario has a medium probability. USD/JPY would be the preferred currency pair to buy, as Treasury yields would jump and dollar/yen is best correlated with returns on US debt.”

“In the unlikely case that base-effects hardly push Core CPI higher and put it only at 1.4% or 1.5%, it would be a positive shock to stock markets – which would assume lower rates for longer. For the dollar, it would result in an even more significant sell-off. The biggest winners would be commodity currencies, which tend to have an outsized reaction to equity rallies. The Canadian, Australian and New Zealand dollars would have room to surge higher.”