Today is a fairly big day as big days go as markets await the release of US March CPI. There appears to have been only cautious position taking ahead of the figure which indicates a lack of strong opinions as to how it will show. The February figure had come in higher than many analysts had expected which in turn cooled expectations for an early end to the Fed’s ongoing tightening cycle and now traders and investors alike will be on tenterhooks to see whether or not the decline in inflation – we’re looking at core, rather than headline – will resume the downward trajectory. The February reading was 5.5% and most market participants seem to be agreed that forecasting today’s number is a bit like pinning the tail on the donkey.

The centre of attention will be the US dollar itself which you might recall is on the retreat from its October highs when it broke out north of ¥ 150 and € 1.04. The sterling exchange rate has a slightly different history thanks to the hiatus caused by the short and rather theatrical premiership of Liz Truss when the pound was sold off all the way down to US$ 1.04. As at the time of writing, it is closer to US$ 1.24. Another favoured mark is the greenback to the Swiss franc which one might have been expected to have tipped against the Swissy in the aftermath of the untimely demise of Credit Suisse but, alas, no such thing and at US$ 0.90 to the franc the exchange rate looks to be heading towards its 2020 all-time low of US$ 0.88. If core CPI comes in anywhere close to 5%, plus/minus a decimal or two, the dollar will in all likelihood fall further and at an accelerated rate.

The big bull market for the US currency was predicated on the Federal Reserve’s earlier and significantly more aggressive move to rein in inflation. Rates were raised by a full 75 bps at each of the four FOMC meetings between June and November 2022 as it looked as though Jay Powell and the gang were prepared to do whatever it took to get back ahead of the curve. Earlier prevaricating around the fabled “transitory” myth had left the FOMC looking as though it had been the one swimming without shorts and it was not going to let that rest.

While most of the remainder of the developed world is still wrestling with inflation much higher than key rates, in other words with negative real returns, the Fed is close to equilibrium with rates at 5% and core CPI at 5.5%. A CPI report today informing us that the inflation beast really is in the process of being wrestled to the ground and that, should it continue to fall further, there will be no need to keep on tightening, especially given the developing weakness at the base of the economy, then the Fed can be safely pegged as the first central bank to switch off the escalator and the dollar will be on the big slide.

The US yield curve has already begun to flatten – 2s/10s by 28 bps in a month – and now the bets can be made as to when it will begin to parallel shift either higher or lower. That’s the next great unknown. If only it was all as simple as the textbooks would have it.

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