EUR/USD retests the 1.1000 thresholds, while GBP/USD tests the 1.2500 level. The US Dollar is also moderately under pressure in other major currency pairs.

The US Dollar Index (DXY) fell to around 101.40 in early European trading on Thursday (April 13th). This was due to the release of US inflation data yesterday. It strengthened the forecast that the Fed would end its monetary tightening cycle with one final 25 basis point interest rate hike at the May FOMC meeting.

dxyDXY Daily DXY Daily chart via TradingView

The United States Consumer Price Index (CPI) showed only a 0.1% growth in March 2023, after a 0.4% growth in February. This slowdown was mainly due to a decrease in fuel prices, significantly dropping the annual inflation rate from 6.0% to 5.0%. However, the core inflation rate increased. The core CPI recorded a 0.4% increase (month-over-month), in line with consensus estimates, resulting in its annual growth rate rising from 5.5% to 5.6%.

Inflation data like this supports the prospect of one more Fed rate hike, which causes a weakening of the US dollar exchange rate. At the same time, the high core inflation supports the expectation that the Fed will maintain high-interest rates and limit the short-term decline of the USD.

EUR/USD retests the 1.1000 thresholds, while GBP/USD tests the 1.2500 level. The US dollar is also moderately under pressure in other major currency pairs.

"While the disinflation trend continues and spreads across the main, core, and supercore CPI data, the CPI report has not indicated an end to the inflation danger," said Simon Harvey, head of FX analysis at Monex Europe. Harvey believes that demand in the US economy remains strong enough to support an inflation rate above the 2% target set by the Fed. He concluded, "This not only strengthens the need for further interest rate hikes, but also does not indicate a prospect of weakening domestic demand under the impending credit tightening standards and falling consumer sentiment."

Minutes from the March FOMC meeting showed that some Fed officials had considered suspending rate hikes following the collapse of several regional banks. However, they believed the inflation danger posed a higher risk and decided to continue raising interest rates.

FedWatch CME data shows a 70% chance of a 25 bps rate hike in May. Data also shows that some market participants still expect the Fed to cut interest rates towards the end of the year. These speculative positions may change, especially if Producer Price Index (PPI) data tonight and US retail sales tomorrow present different scenarios.