USD May Return to Strengthening on Disappointing Inflation Report

The dollar strengthened on Wednesday ahead of the release of a key U.S. inflation report, which came out in the negative tonality. The U.S. CPI in March rose 0.4% for the month and 3.5% YoY, against estimates of a 0.3% monthly increase and 3.4% annually, according to economists polled by Dow Jones. Core CPI, which excludes volatile components such as food and energy prices, accelerated 0.4% MoM while rising 3.8% from a year ago, compared to estimates for 0.3% and 3.7%, respectively. CPI in April increased at a 3.2% annual pace for all items.

The inflation data followed a strong jobs report last Friday that beat forecasts, raising questions about how soon and how much the central bank will cut rates this year.

The NZ kiwi, meanwhile, briefly touched a 3-week high earlier this morning after the Reserve Bank of New Zealand, as expected, left rates unchanged but similarly warned of persistent inflation.

As a result, futures traders cut bets to the lowest level since October, about 60 basis points, on an interest rate cut this year.

The U.S. interest rate futures prevailed towards the probability of a first rate cut in June at around 60%, up from 51% on Monday, but now, after the above data release, they moved down the road to September according to CME Group's FedWatch tool, although the probability of a rate hold rose to 40%. So strong core CPI destroyed the case for a June rate cut, as there are still two more CPI readings before the meeting that are likely to be insufficient to show a trend of slowing inflation.