US CPI Preview: See how you can take advantage of Wednesday’s key economic data

Is U.S. inflation peaking after the fastest surge in over 40 years? The April consumer price index, due on Wednesday, is set to tell.

March CPI came in at 8.5% on an annualized basis, as gasoline costs hit record highs which probably sealed the Fed’s 50 basis-point rate rise on May 4th. However, early forecasts expect this month’s CPI to show a 0.2% monthly rise, an indication that inflation might have peaked.

Traders will be watching for signs dollar power can continue this week, as this upcoming inflation print could sway expectations for how monetary policy will be adjusted going forward. Analysts believe that if the headline inflation comes in and shows that month-on-month CPI is heading in the right direction, then it makes the case for potentially a more dovish Fed and hikes being priced out.

A decline in CPI would not necessarily signal a pivot in the Federal Reserve’s hawkish strategy which has boosted the dollar. Any larger than expected falls can perhaps suggest that the Fed need not be as aggressive in its hiking plans, and there are plenty of Fed speakers this week too.

The surge in consumer price inflation has been having a major impact on the living standards of households, especially lower-income households, which tend to spend a larger share of their income on food and other necessities. Households now face the prospect of deteriorating personal finances against the backdrop of weaker national economic growth and delayed post‑crisis recovery.

Asset to watch: USDJPY

Among all global central banks, the BOJ is arguably the most dovish (and has been for years) whereas the Fed is among the most hawkish, so it’s no surprise that USD/JPY has been on a tear in recent weeks

If inflation comes out hotter-than-expected (pointing to an even wider monetary policy divergence), the pair could extend its gains within its well-defined near-term bullish channel. Meanwhile, a soft inflation report could break the said channel, though it would take a break below last week’s low near 128.60 to shift the near-term bullish bias back to neutral:

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