- USD weakens on soft inflation
- Raises risk Trump mouths off at the Fed again
- Still too soon to say tariffs won't have an impact
Above: 'Liberation Day' tariff chaos has not yet been reflected in U.S. price data. Image: White House official.
The Dollar lost value after U.S. inflation printed below consensus expectations.
Inflation for April stood at 2.3% year-on-year, which was below the previous month's and consensus estimate of 2.4%.
This as the month-on-month figure printed at 0.2%, which is an undershoot against the 0.3% expected.
Markets were keenly interested in finding out whether President Donald Trump's tariff threats are impacting pricing behaviour in April. On the face of it, the answer would be not yet.
The core CPI inflation figure also read at 0.2%, whereas the expectation was for 0.3%.
These soft data nudge higher the odds of a Q2 rate cut at the Federal Reserve, which is weighing on the Dollar.
The Pound to Dollar exchange rate (GBP/USD) trades higher by 0.4% on the day at 1.3224.
Although these data are a headwind to the Dollar, downside will likely be limited by ongoing uncertainty as to whether or not tariffs, or at least the threat of tariffs, will have a material impact on the economy.
Importantly, we know there was a surge in imports ahead of Trump's 'Liberation Day' tariff announcements as importers front-ran the hit. This means there is a cushion of stock to protect against immediate price rises.
By extension, this means stock drawdowns and price rises await.
There is evidence that trade has been materially impacted, with a notable slump in inbound shipping rates at U.S. ports, which would normally point to scarcities that push prices higher.
Scarcities and price rises are yet to come, and the Federal Reserve will maintain caution and swerve a rate cut in the coming months.
"While good news, the numbers will have little impact on the ongoing debate on the possible inflationary impact of tariffs — between those who will interpret these numbers as illustrating no price pass-throughs to speak of, and others who will argue it’s too early to see them," says Mohamed A. El-Erian, a noted economist and former Pimco CEO/co-CIO.
Above: GBP/USD at 15-minute intervals.
"We expect the Fed to remain in wait and see mode for a good while and this reading does not change their view that inflation remains somewhat elevated," says Knut A. Magnussen, Senior Economist at DNB Carnegie.
However, some analysts warn that the U.S. President will jump on these figures and renew calls for the Federal Reserve to act and cut interest rates.
"The White House can point to this now and legitimately ask why the Fed hasn't moved," says Chris Beauchamp, Chief Market Analyst at IG.
Trump has dialled down his rhetoric against the Fed since it was seen contributing to a slump in U.S. assets (an independent Fed is a cornerstone of trust in the U.S. economy and financial system).
These data might prove too tempting for Trump to resist taking another potshot at Governor Jerome Powell. If so, further USD weakness might ensue, as was the case when Trump regularly attacked the Fed in April.