The United States will report producer and consumer price data this week, but with neither indicator expected to alter the inflation outlook, the data will probably play second fiddle to trade headlines when it comes to the US dollar. The producer price index (PPI) is out on Thursday at 12:30 GMT, while the consumer price index (CPI) will be released on Friday, also at 12:30 GMT.
CPI and PPI to edge higher
Both headline and core CPI turned higher in March, having hit more than two-year lows in February. The rebound is expected to have continued in April, with the annual rate of CPI forecast to rise from 1.9% to 2.1% and core CPI anticipated to nudge up 0.1 percentage points to 2.1%.
Producer prices are also projected to rise slightly. PPI for final demand and PPI excluding food and energy are forecast to edge up by 0.1 percentage points each to 2.3% and 2.5% year-on-year, respectively.
If the upward trend is confirmed, it would suggest the Fed’s preferred price barometer, the core PCE price index would soon follow suit.
Fed sees weak inflation as temporary
Fed policymakers, including Chairman Jerome Powell, have signaled they expect the current weakness in inflation to be transitory. Stronger inflation numbers on Friday would, therefore, add support to this view, possibly further dashing expectations of a rate cut over the next 12 months.
A pick-up in growth in the first quarter and an ever-tightening labour market have also helped restore the bullish outlook for the US economy, and in turn, for the greenback.
Trump raises trade stakes with China
However, with trade tensions flaring up again, it may be too soon to assume that the downside risks have receded substantially, especially as much of the improvement in risk sentiment seen this year was driven on the back of easing trade frictions. President Trump raised the stakes in the trade talks with China on Sunday when he unexpectedly announced that tariffs on $200 billion worth of Chinese imports would increase from 10% to 25% as early as this Friday.
But there is still some hope that a further flare-up can be averted as China’s most senior negotiator, Vice Premier Liu He will travel to Washington on Thursday for two days of talks. If the two sides fail to resolve the key sticking points, the most likely outcome is that the US will go ahead with its planned tariff hikes this week and threaten to impose levies on all remaining imports from China.
Yen has most to gain from trade stand-off
Markets have yet to fully process the potential impact from a possible complete breakdown in the trade negotiations, especially at a time when the US is expanding its fight to Japan and the European Union as well. While equity markets have taken a significant beating, the reaction in forex markets has so far been somewhat more muted, with the yen perhaps being the exception.
The safe-haven Japanese currency has appreciated notably since Trump’s fresh threats, while the dollar has not enjoyed the same level of a boost as it did when trade tensions first started to surface in 2018. USD/JPY touched its lowest level in six weeks on Wednesday and is fast approaching the 38.2% Fibonacci retracement of the up leg from 104.96 to 112.39, which is around 109.55.
Further setbacks in talks this week could push the pair below this key support, opening the way towards the 50% Fibonacci at 108.68. Stronger-than-expected inflation readings would likely provide modest support at best in a risk-off environment, while only concrete progress in the trade discussions would likely enable USD/JPY to reclaim the 111 level.
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