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Apr 11 - 09:55 AM

MUFG: Implications of March's US CPI Data; Our 1.09 EUR/USD Q2 Target Now Appear Overly Optimistic

By eFXdata  —  Apr 11 - 09:02 AM

Synopsis:

MUFG examines the significant impact of the recent US CPI report for March, suggesting it could notably shift USD trends in the upcoming months. The core CPI's monthly rise of 0.4% showcased more widespread inflation pressures than previously anticipated, particularly beyond housing rents. This development spurred a substantial increase in US yields and, consequently, a notable uptick in the US dollar's value. Given this is the third consecutive month of inflation exceeding forecasts, MUFG speculates that the Federal Reserve (Fed) might require additional compelling data before considering rate cuts, making a reduction in June increasingly doubtful.

Key Points:

  • CPI Surprises: The March core CPI reading exceeded expectations, indicating broader inflationary pressures that contributed to a surge in US yields and the dollar's value.
  • Fed's Rate Cut Outlook: Continuous inflationary pressures suggest the Fed may adopt a more cautious stance towards rate cuts, potentially delaying them beyond June.
  • Short-Term USD Outlook: The immediate aftermath of the CPI report has opened a window for further USD strength, particularly with the Fed's June rate cut looking less likely.
  • EUR/USD Projections: Given the altered monetary policy landscape, MUFG believes their end-Q2 EUR/USD forecast may now appear overly optimistic, with short-term dynamics favoring USD appreciation.

Conclusion:

MUFG posits that March's higher-than-expected CPI data could significantly influence USD movements in the near term, prompting a reevaluation of Fed rate cut expectations. The broader inflationary pressures observed may deter the Fed from cutting rates as early as June, thereby supporting USD strength, especially in the short term. This adjustment in monetary policy expectations, alongside the ECB's potential rate cuts, suggests a more cautious outlook for the EUR/USD pair, with possibilities for further USD appreciation in the weeks leading up to the next NFP release.

Source:
MUFG Research/Market Commentary

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