Markets are expecting the Fed to hike rates by 25bps on May 3 to 5.125% from the current rate of 4.875%. However, one of the crucial factors for that rate decision will be how the US is managing inflation. This is what Wednesday’s print at 13:30 UK time is going to tell us.

The expectations

The market is expecting the headline CPI print for March to fall to 5.2% from 6%.

The highest expectation from polled economists is for a 5.9% print. The lowest expectation is for a 5.1% print. So, that tells us two things. Firstly, inflation is expected to fall and that is positive for a slower rate path. Secondly, any print under 5.1% will be a positive surprise hinting the Fed is winning the inflation battle. However, we also have to factor in the core reading.

Core focus

The core reading for March is expected to come in at 5.6% which is actually higher than the prior reading of 5.5% for February.

This shows a ‘stickier’ core which will be a concern if it stays stubbornly stuck. The lowest expected reading is 5.4% from economists polled, so a low surprise will need to come in below 5.4% to show the Fed winning the inflation battle.

The reaction

If the headline print comes in below 5.1% and the core below 5.4% then markets will start to dial back on expectations of a 25bps rate hike for May’s Fed meeting. In the near term that would typically support gold, send the USD lower, and lift US stocks. If there is a big miss in the CPI data will gold break out multi-year highs and reach for $2100?