US Import Price Index (MoM) (MAR) (12:30 GMT; 08:30 EDT)
Expected: 2.0%
Previous: 0.2%

Import Price Index (YoY) (MAR) (12:30 GMT; 08:30 EDT)
Expected: 13.7%
Previous: 13.6%

What Are the Markets Facing?

With the US Dollar still relatively weak against the majors, there are concerns that import price inflation will rise significantly. The prospect of increased price pressures only compounds the problems that the Federal Reserve already faces as they’ve slashed the federal funds rate by 300 basis points since September in an attempt to forestall a broad-based economic recession and a full-on credit crunch. Furthermore, they are expected to cut by at least 25bps at the end of the month, as futures are pricing in a 40 percent chance of a 50bp cut. However, none of these risks appear to have diminished yet and fed fund futures continue to price in multiple rate cuts in coming months. What about that pesky inflation issue? Won’t more accommodative monetary policy only fan price pressures? This topic may come to the forefront on Friday as the US import price index is expected to have risen 2.0 percent in March from the month prior while the index is also forecasted to have surged a whopping 13.7 percent from a year earlier. Such a result will only increase anticipation for the CPI release next week, which is also very likely to highlight the rising inflation pressures in the US economy and effectively leaves the Federal Reserve’s hands tied. Will they continue to attempt to stave off a collapse in the economy and equity markets while abandoning their price stability mandate, or will they leave monetary policy unchanged to give themselves more time to plot their next move? With two FOMC members voting for ‘less aggressive’ policy action during the March meeting, it is clear that some central bankers are uneasy with the inflation scenario, and signs of mounting price pressures in the economy could lead traders to cut back speculation of a 50bp reduction in favor of a milder 25bp cut.

Bonds – 10-Year Treasury Note Futures

Treasuries continue to consolidate within range, but the contract may ultimately test trendline support at 115-28/30. Upcoming event risk for Treasuries includes the release of the US import price index, and if the release indicates that the Committee will be hesitant to continue cutting rates aggressively as a result of building inflation pressures, the contract is likely to plummet. On the other hand, a pronounced pessimistic tone on the financial markets could lead Treasuries to rebound toward 118, as futures will quickly shift to price in a 50bp cut on April 30.

FX – EUR/USD

The EUR/USD pair continues to consolidate within an ascending triangle, suggesting some potential for a break higher to test at least 1.60. However, this particular consolidation period could last for weeks or months, and in the near term, the US dollar could make a comeback as the US import price index is anticipated to reflect building inflation pressures. With two FOMC voting members (Fisher and Plosser) voting for ‘less aggressive’ policy action during the March meeting, when the Fed cut by 75bps, a jump in import prices could lead to speculation that additional central bankers will become concerned about these price pressures. Currently, fed fund futures are fully pricing in a 25bp cut to 2.00 percent on April 30 and a 40 percent chance of a 50bp reduction. If import prices prove to be stronger than estimated, the markets may cut back their expectations of 50bp, which could help push EUR/USD down toward trendline support near 1.5600.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has thus far been able to hold above 12,500, but nevertheless, the long-term trend remains to the downside, and in the near-term, substantial resistance looms above at the 12,680/700 level where we have a 50% fib, the February highs and the 100 SMA. However, the recent flag formation and underlying trendline support suggests some potential for one last pop higher. Risk trends will remain the biggest driver of day-to-day price action, but the upcoming release of the import price index could weigh the DJIA toward 12,460/500, as the data will likely indicate that inflation pressures remain strong.

Terri Belkas is a Currency Strategist at FXCM.