US Headline CPI (YoY) (MAR) (12:30 GMT; 08:30 EDT)
Expected: 4.0%
Previous: 4.0%

Core CPI (YoY) (MAR) (12:30 GMT; 08:30 EDT)
Expected: 2.4%
Previous: 2.3%

What Are the Markets Facing?

Upcoming US data is anticipated to suggest that the economy is facing one of the Fed’s worst fears: stagflation. Indeed, the markets are already well aware that expansion has slowed dramatically, and the jump in Tuesday’s producer price index reflects rocketing costs at the factory gate. Is this trickling down to the consumer level. Traders will find out on Wednesday. The US headline consumer price index for the month of March is expected to rise 0.4 percent to leave the annual rate of growth at 4.0 percent. A bulk of the increase will likely be the result of food and energy price gains, especially as oil traded above $100/bbl for the entire month. Nevertheless, even core CPI is anticipated to show a 0.2 percent rise for the month and a pick up in the annualized reading to 2.4 percent. If any of these figures surprise to the upside or downside, the markets will respond accordingly and the moves could be dramatic. On the other hand, if the CPI reports are released in line with expectations, Treasuries, the US dollar, and US stock markets may simply trade quietly until the release of the Fed’s Beige Book at 14:00 EDT. As a summary of economic conditions throughout each of the 12 Fed districts, the report could give key insight into how the FOMC will vote on April 30. Some of the key factors to watch will be employment, consumption, and inflation data, especially as labor markets have deteriorated and Monday’s Advance Retail Sales report showed that spending has increased purely on the back of gasoline receipts.

Bonds – 10-Year Treasury Note Futures

Treasuries continue to consolidate within a tight range, but the contract may ultimately test trendline support at 115-30. Indeed, upcoming event risk for Treasuries includes the release of US CPI, and if the release indicates that the FOMC may be hesitant to aggressively cut rates in the face of building inflation pressures could weigh the contract down. On the other hand, surprisingly soft CPI figures or a market-wide return to risk aversion could send Treasuries rocketing toward 118-20.

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. This particular consolidation period could last for weeks or months, but in the near term, the US dollar could advance as US CPI is anticipated to reflect mounting inflation pressures. Currently, fed fund futures are fully pricing in a 25bp cut to 2.00 percent on April 30 and a 30 percent chance of a 50bp reduction. If the data does indeed suggest that the Fed will be less aggressive in cutting rates at the end of the month, EUR/USD could drop below near-term support at 1.5750 toward 1.5665/78. However, if US CPI is surprisingly soft, the markets may take the news as a green light for the Fed to continue slashing rate, which could propel the pair up to the record highs once again.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average finally broken out of its tight range last week, only to return to a different once. Indeed, the index has done nothing but consolidate losses just above support at 12,270. Indeed, the long-term trend remains to the downside, and the break below 12,500 only underpins this bias. Risk trends will remain the biggest driver of day-to-day price action, but the upcoming release of the US CPI data could weigh the DJIA toward 12,175, as the data will likely indicate that inflation pressures are building.

Terri Belkas is a Currency Strategist at FXCM.