Derek Halpenny, European Head of GMR at MUFG, suggests that no doubt Fed Chair Yellen will have been pleased with the inflation data, released in the US yesterday that revealed a slowdown in the core annual CPI rate from 2.3% to 2.2%. Key Quotes “That will help support the Fed’s shift for now but there remains little logic in the view that the inflation pick-up is in some way transitory when we have had nine consecutive increases in the annual rate up until the data yesterday showed a 0.1ppt reversal. Housing tends to track wage growth and hence if you believe the labour market data will lift wage growth then the scope for a period of decelerating inflation looks very limited indeed. On the topic of inflation, today we also get the Michigan sentiment preliminary report for April and given the 17% increase in retail gasoline prices in March and the 6.5% gain in the S&P 500, the sentiment reading and the inflation expectation measure may have picked up further. Yellen has mentioned evidence of falling inflation expectations in survey measures as a concern. St. Louis Fed President Bullard again expressed a desire for lifting rates stating that it was “prudent” to move the fed funds rate closer to normal policy settings. But it is clear that there remains a deep scepticism over the ability/willingness of the FOMC to raise rates any time soon. As before, there will come a point when a more notable shift in expectations may well take place. The longer we witness the data from China like today and the longer we witness crude oil prices remaining around current levels, the more important the US domestic economic situation becomes. Our sense is that with real GDP expected to be close to flat, market participants will not consider pricing in a June rate hike (and hence buying the dollar) until at least that event has passed. So until then we see the dollar remaining around current levels versus the major G10 currencies but the stability in financial markets may be tested in May as investors more seriously consider the prospect of a June rate increase.” For more information, read our latest forex news.