On Wednesday, dollar bulls are poised for potential gains as the Labor Department prepares to release the March U.S. consumer price index (CPI) report. Despite a general downtrend in inflation, stronger-than-expected CPI readings over the past three months have typically led to a rise in the ICE U.S. Dollar Index, which measures the currency against a basket of six major rivals. Bank of America strategists Vadim Iaralov and Howard Du noted that, on average, the dollar index has increased by 0.45% in the 30 minutes following the CPI release.
Economists surveyed by the Wall Street Journal anticipate that the March CPI will show a 0.3% rise, following a 0.4% increase in February. The year-over-year rate is expected to accelerate to 3.5% from 3.2%, while the core CPI reading, which excludes volatile food and energy prices, is forecasted to come in at 3.7% year over year, compared to 3.8% in February.
In terms of stock market performance on CPI-release days in 2024, the S&P 500 experienced mixed results. Following the December CPI reading, the index fell less than 0.1% on January 11. However, it dropped 1.4% on February 13 after the January CPI release, and then rallied 1.1% after the February data on March 12.
While the dollar typically sees a post-CPI rally, it often retraces some of its gains throughout the trading day. On CPI-release days, the dollar index has historically recorded an average gain of 0.37%.
Bank of America strategists highlighted that the Norwegian krone and Swedish krona have been particularly impacted by the dollar’s post-CPI rallies, with both currencies tending to remain weaker against the dollar throughout the trading day.
The occurrence of four consecutive months of hotter-than-expected CPI readings is relatively rare, with only three such instances identified since Bloomberg began tracking consensus forecasts in 2004: February-May 2011, March-June 2021, and March-June 2022. The last two instances in 2021 and 2022 directly contributed to the Federal Reserve’s hawkish pivot at the June 2021 policy meeting and the significant 75-basis-point rate hike at the July 2022 meeting.
Despite being relatively flat on Tuesday morning and experiencing a slight decline since the end of March, the dollar index remains up 2.8% for the year to date.