The dollar dropped sharply on Wednesday after data showed U.S. consumer prices rose less than expected in March, raising expectations that the Fed is likely to stop hiking rates after a possible increase in May.
The Consumer Price Index (CPI) climbed 0.1% last month, below economists’ expectations for a 0.2% gain, and down from a 0.4% increase in February. In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. The CPI rose 6.0% on a year-on-year basis in February.
Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. Sticky rents continued to drive core CPI.
“Headline inflation coming down more than expected is backing the view of the Fed being basically one more and done,” said Joe Manimbo, senior market analyst at Convera in Washington, D.C.
“The market was just really cautious ahead of the data, as if it had been hotter than expected it might suggest that June might also be a live meeting. But I think with inflation taking a big step down from 6% to 5%, if that sustains, that could give the Fed leeway to cut rates later this year if we see a sharp slowdown in the economy,” Manimbo added.
The dollar index was last at 101.68, down 0.41% on the day and below the level of around 102.11 before the data. The euro reached $1.09900, the highest since Feb. 2, and was last at $1.0967, up 0.48% on the day. The dollar dipped to 133.04 Japanese yen , from around 133.85 before the data.
Fed funds futures traders are pricing in 69% probability that the Fed will raise rates by an additional 25 basis points at its May 2-3 meeting, down from around 76% before the data.
Retail sales data on Friday will be analyzed next for how consumer spending is being affected by higher prices.
The Fed will release minutes from its March 21-22 meeting later on Wednesday.
