The latest numbers on American inflation
have left the global financial community wondering. How many times will the
Federal Reserve cut interest rates this year? With inflation at a four-year
low, markets are tracking every hint and putting their probabilities together
with rising confidence. The April 2025 Consumer Price Index (CPI) figure,
released on May 13 by the Bureau of Labor Statistics, was a stark departure
from the inflation forecast and had the potential to determine the Fed’s action
plan for the rest of the year.
Disinflation gathers pace
The April headline CPI rose just 0.2%, a
recovery from the 0.1% fall in March. Far more significant, the year-on-year
inflation rate slowed to 2.3%, the lowest since February 2021. The reading
records not just the fading away of pandemic-driven temporary price shocks but
also the growing potency of the Fed’s two-year effort at aggressive monetary
tightening.
Core CPI, stripping out volatile food and
energy prices, also held steady at 2.8% year-over-year. While still above the
Fed’s 2% benchmark, the slowdown is the first sign that the most stubborn
causes of inflation — services, housing, and wage-sensitive sectors — are no
longer accelerating.
Highlight April activity is a sharp 12.7%
decline in egg prices and a 0.4% decline in “food at home” as both
capture relief in pantry goods. Shelter costs, which make up more than
one-third of the CPI basket, however, rose 0.3%. This ongoing rise in housing
costs remains frustrating to the Fed as core inflation continues to be sticky
even as headline numbers ease.
Reading between the lines
At its May 7 session, the Federal Reserve
decided to leave its target rate of 4.25%-4.50% in place, citing
“cross-economic trends” and the still uncertain rate of core
inflation. Fed Chairman Jerome Powell made cautious but honest comments at his
press conference, casting aside any reservations when he stated that a rate cut
is within reach, but not necessarily a given.
“We notice encouraging signs, but
too soon to declare victory,” Powell stated. “We need more confidence
that inflation is on track to a sustainable path to 2%.”
The Fed release also mentioned new
geopolitical tensions, decelerating capital expenditures, and the emerging
effects of recent trade measures. Market participants interpret the Fed’s words
as “dovish”, since futures prices signal one or two rate cuts through
2025, and some speculative bets signal three.
The irony is not lost on veteran
investors: whereas the Fed assures it uses data, markets increasingly depend on
the Fed. Each drop in the consumer price index, each report on labor markets,
and each trade news headline are now used in figuring out the rate cut.
Trade tensions and tariffs
April also saw the introduction of a 10%
across-the-board tariff applied to all US imports, as well as targeted
increases on Chinese consumer electronics, EV batteries, and foreign-made
autos. These protectionist measures, although geared toward reshoring critical
supply chains and energizing domestic production, pose a complex inflationary
risk.
So far, these tariffs have not much
impacted consumer prices — perhaps due to long-term contracts, delayed
pass-through effects, or offsetting cuts elsewhere. But experts expect
inflation to return in the summer once businesses begin to raise their prices.
Substantial progress is the initial
US-China trade agreement in early May to reduce trade tensions. Under this
agreement, both nations agreed to roll back selected tariffs during Q3 2025. If
it succeeds, the agreement will solve some of the tariff-sustained inflation
and soften pressure on the Fed to be higher for longer.
Forex markets
USDollar, Weekly
A key rate cut could significantly affect
the market as a whole. Let’s examine a few instruments closely.
USDollar fell to the critical support
area of 61.8 Fibonacci, and rebounded. However, the price is ready to retest
this area again. At the same time, Parabolic SAR indicates the possibility of
growth, and CCI came out of the oversold zone.
●
A break of the 99.000 support area
will drop the price to 95.500;
●
A rebound from the support will
bring USDollar back to 101.500 and further to 104.000;
XAUUSD continues to update historical
highs, and the price is consolidating near 261.8 Fibonacci. The price crossed
the upper Bollinger line, indicating overbought.
XAUUSD, Monthly
●
Consolidation above 3300 will open
the way to 4200;
●
A rebound from resistance will
drop Gold to 2750 and on further decline to 2500;
It is currency traders’ top worry whether
the European Central Bank and the Bank of England will follow suit. If the Fed
cuts spending but its counterparts do not, the dollar could fall further. But
if inflation stabilizes and the Fed procrastinates, the dollar’s appreciation
could persist.
Meanwhile, the Japanese yen and Swiss
franc, the safe-haven currencies, also increased modestly as expectations of
falling interest rates cause the re-evaluation of risks. Volatility in the
foreign exchange market is expected to increase during the summer.
How many cuts are coming?
With the April CPI numbers in hand and
inflation seemingly front and center, everyone is waiting for the Federal
Reserve to act. It’s no longer a question of whether the Fed will cut rates,
but how often. The existing futures markets are already pricing in a 70% chance
of the first cut being in September, followed by a second in December, which is
increasingly likely.
But there is uncertainty. Sticky core
inflation, geopolitical uncertainty, the wild card path of tariffs, and a
still-resilient labor market complicate the projection. The Fed’s dual mandate
— maximum employment and price stability — remains a tightrope. If hiring slows
while inflation keeps falling, the Fed could move more aggressively. If
inflation re-accelerates, cuts could be delayed into never-never land.
Conclusion
The April consumer price index report may
be the most significant reading of the year. He puts the US economy at a fork
in the road: low inflation, steady jobs, and a central bank faced with patience
or preventive measures. The next couple of months will be a test of the Fed’s
mettle, market imagination, and the strength of international trade.
For the currency markets, volatility will
be an opportunity as well as a risk. As the Fed balances down the inflation
rate and the dollar serves as a barometer of the world’s economy, volatility
will make both investors and policy makers prepare for a data-driven,
diplomatically influenced, and decisions-yet-to-be-made second half of 2025
