US CPI data expected to show inflation eased in March, supporting dovish Fed rate cut path

• The US Consumer Price Index is forecast to rise 2.6% YoY in March.
• The core CPI inflation is seen a tad lower at 3% last month.
• The inflation data could influence the Fed's rate outlook and the US Dollar's performance.

The United States (US) Bureau of Labor Statistics (BLS) is set to publish the high-impact Consumer Price Index (CPI) inflation report for March on Thursday at 12:30 GMT.

The CPI figures could notably impact the US Dollar (USD) and the Federal Reserve's (Fed) monetary policy outlook.

What to expect in the next CPI data report?

As measured by the CPI, inflation in the US is set to rise at an annual pace of 2.6% in March, down slightly from the 2.8% reported in February. Core CPI inflation, which excludes the volatile food and energy categories, is expected to ease to 3% in the same period from a year earlier, compared to a 3.1% growth in the previous month.

On a monthly basis, the CPI and the core CPI are projected to rise 0.1% and 0.3%, respectively.

Previewing the report, analysts at TD Securities noted: "We expect this week's CPI report to show that core inflation maintained a still firm 0.26% m/m pace in March following the cooler than expected expansion in the last report. In the details, we look for goods inflation to cool down after two consecutive firm increases while services prices likely gained some momentum."

"In terms of the headline, we project CPI inflation to ease again to a mild 0.07% m/m in March, led by a considerable contraction in the energy component. We also expect food inflation to lose additional momentum, printing flat m/m," TD Securities analysts added.

How could the US Consumer Price Index report affect EUR/USD?

Markets are growing increasingly concerned over the US economy tipping into recession due to expectations of the global trade conflict triggered by US President Donald Trump's aggressive tariffs weighing heavily on economic activity. In turn, the Federal Reserve (Fed) is now projected to take a dovish turn. According to the CME FedWatch Tool, markets are currently pricing in about a 37% probability of the Fed lowering the policy rate by 25 basis points (bps) at the May policy meeting, up from 10% on April 1.

Fed policymakers, however, put more emphasis on the potential impact of tariffs on inflation rather than the growth outlook in their recent speeches. "The Fed's obligation is to make certain that a one-time increase in price levels doesn't become an ongoing inflation problem," Fed Chairman Jerome Powell said. Similarly, San Francisco Fed President Mary Daly said that she is concerned that inflation may pick back up from tariffs, while Chicago Fed President Austan Goolsbee noted that there is anxiety among businesses that high inflation will return.

The market positioning suggests that the USD is facing a two-way risk heading into the inflation data release. A stronger-than-expected annual headline CPI print could feed into expectations for a Fed policy hold in May and boost the USD with the immediate reaction. On the other hand, a reading at or below 2.5% in this data could weigh on the USD and help EUR/USD continue to push higher.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains:

"The Relative Strength Index (RSI) indicator on the daily chart holds above 60 and EUR/USD trades above the 20-day Simple Moving Average (SMA) after testing this level several times in the past week, reflecting a bullish bias in the near term.

"On the upside, 1.1150 (static level) aligns as the next resistance before 1.1200 (static level) and 1.1275 (July 2023 high). Looking south, the first support could be spotted at 1.0880 (20-day SMA) ahead of 1.0800 (static level) and 1.0740 (200-day SMA).