FX.co ★ Could US inflation stabilize?

Market players are likely fully focused on tomorrow's US CPI data release.

According to consensus estimates, the consumer price index is expected to rise to 8.4% year-over-year in March, compared to 7.9% in February. Month-over-month, inflation is projected to rise to 1.2% from February's 0.8%. The core CPI is forecasted to increase to 6.6% year-over-year in March, compared to 6.4% in February.

How can the market react tomorrow if inflation matches or exceeds expectations?

Last week, Fed policymaker Lael Brainard rattled both US and global markets by stating that the US regulator should reduce its balance sheet and hike interest rates more aggressively. As a result, investors dumped both US Treasury bonds and equities. The US dollar found some support in her statements.

Given the current mood of Fed board members, such as Brainard, if inflation matches or even exceeds the above-mentioned forecasts, it will cause stock indexes to slump both in the US and globally, pushing USD up.

Growing inflationary pressure, coupled with the hawkish stance of Fed policymakers, could result in the US regulator hiking interest rates by 0.50%, which is also in line with Fed funds rate futures, and not by 0.25%.

What if inflation is lower than expected?

This scenario is also possible. Joe Biden managed to stabilize oil prices - this could also slightly reduce gasoline prices and lower inflation as well. Such a scenario is extremely unlikely. However, if inflation does stabilize, the Fed would not continue hiking the rates aggressively. This would lead to a short-term equities rally and weaken the US dollar - a trend which would continue until early May.