US Dollar: Hotter CPI and equity risks – ING

ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner expect a 0.9% MoM United States (US) Consumer Price Index (CPI) print, above consensus, with core at 0.3% MoM. They argue this could reinforce hawkish repricing in the USD curve, but say Dollar upside hinges on how equities react and on developments in US-Iran talks, which they see as a growing medium-term support for the Dollar. US inflation, equities and Iran risks US CPI data for April is released today, and we forecast a second consecutive 0.9% MoM headline print, taking YoY inflation to 4.0%. This would be well above the 0.6% MoM / 3.7% YoY consensus, although we are in line with expectations of a 0.3% MoM / 2.7% YoY core CPI print. The rebound in the headline will be driven primarily by gasoline and diesel prices, while a recovery in medical care and recreation prices should account for the 0.3% MoM acceleration in core. Still, it is probably too early to expect clear evidence of second-round effects, and we suspect that a hotter-than-expected headline print could be sufficient to give the recent hawkish repricing in the USD swap curve some additional momentum. There is currently 7bp of Fed tightening in the curve by year-end. The positive implications for the dollar, however, may depend more on the equity channel than on rates. Global risk sentiment has remained a more dominant driver than short-term rate differentials and oil prices for several USD crosses, including EUR/USD. Good days for the greenback have generally coincided with bad days for equities of late. That said, CPI is still likely to play second fiddle to any meaningful developments related to Iran. Recent days have underscored how far apart Iran and the US remain on key aspects of a nuclear deal. At the same time, markets have been reluctant to price a renewed escalation, despite Trump’s claim yesterday that the ceasefire is “on life support” and further reports of military activity in the Strait of Hormuz. The longer this stalemate persists, the greater the upside risks for the USD, both in the near term and over the medium run – the latter via a more prolonged drag on the global economy, to which the dollar is typically negatively correlated.