US Inflation Set for Another Sharp Jump as US-Iran Conflict Lifts Oil Prices

The US Bureau of Labor Statistics (BLS) will publish the April Consumer Price Index (CPI) data on Tuesday. The report is expected to show another significant leap in consumer inflation after Marchs sharp increase, driven by the elevated Oil prices due to the ongoing conflict between the United States (US) and Iran. The monthly CPI is forecast to rise 0.6%, following the 0.9% increase recorded in March, while the annual reading is seen climbing to its highest level since September 2023 at 3.7%, from 3.3% in March. Core CPI figures, which exclude volatile food and energy prices, are expected to come in at 0.4% and 2.7%, on a monthly and yearly basis, respectively. From the beginning of the conflict in the Middle East on February 28 to the end of April, the barrel of West Texas Intermediate (WTI) rose more than 50%. Although crude Oil prices corrected lower in the first week of May, they are still about 40% above where they were before the US-Iran war. Previewing the inflation data, our economists expect headline inflation to rise by +0.58% month-on-month, moderating from Marchs +0.9%, but still relatively firm, said Deutsche Banks Jim Reid. In contrast, the core measure is projected to accelerate to +0.39% MoM from +0.2%, suggesting underlying price pressures remain sticky even as energy-related effects fade. The YoY rates would move from 3.3% to 3.8% for the former and from 2.6% to 2.8% for the latter, Reid added. What to Expect in the Next CPI Data Report? CPI figures for April will reflect the impact of persistently high Oil prices on inflation. Since this is largely anticipated, core inflation figures will help markets gauge whether rising energy costs are spilling over into the broader economy and driving up the prices of other goods and services. A reading above the market expectation of 0.4% in the monthly core CPI could feed into concerns over high inflation getting entrenched in the economy. Conversely, a print below analysts forecast could ease fears over prices getting out of control. Still, even in this latter scenario, investors are unlikely to breathe a sigh of relief because the US-Iran crisis remains unresolved and the lack of naval activity in the Strait of Hormuz continues to pose a significant risk to global energy supply chains. Minneapolis Federal Reserve (Fed) President Neel Kashkari said the price shock from a prolonged closure of the strait could put inflation expectations at risk and requires a strong policy response. Similarly, St. Louis Fed President Alberto Musalem noted that inflation is meaningfully above the Feds target and added that policymakers need to worry about the underlying inflation, along with tariff and Oil shocks. How Could the US Consumer Price Index Report Affect EUR/USD? Markets currently see about a 73% chance of the Fed leaving the policy rate unchanged at 3.5%-3.75% by the end of the year, and price in about a 20% probability of a 25 basis points (bps) hike, according to the CME FedWatch Tool. Source: CME Group A stronger-than-forecast monthly core CPI print for April could cause investors to lean toward a rate hike later in the year. In this scenario, the US Dollar (USD) could gather strength with the immediate reaction. On the other hand, a soft core CPI print could have the opposite effect on the USDs valuation. However, unless there are any significant developments hinting at the US-Iran conflict coming to an end soon, any negative impact on the USD could remain short-lived. Investors will be on heightened for the possibility of further delays to the first rate cut or even an inability to ease in 2H26 altogether should energy prices rise sharply and persistently due to an escalation or prolongation of the Middle East conflict, UOB Groups Alvin Liew explains. A broader oil-related price spillover across the CPI basket would materially complicate the inflation outlook, raising the risk that the anticipated year-end cut is pushed into 2027, Liew elaborates. Eren Sengezer, FXStreet European Session Lead Analyst, shares a brief technical outlook for EUR/USD. EUR/USDs near-term technical outlook points to a bullish stance that lacks strength. The Relative Strength Index (RSI) indicator on the daily chart holds above 50 but retreats after testing 60, and the pair struggles to pull away from the 20-day Simple Moving Average (SMA) despite closing well above it to end the previous week. On the upside, the first resistance area aligns at 1.1800-1.1820, where the upper limit of the Bollinger Band and the Fibonacci 61.8% retracement of the February-April downtrend align. In case EUR/USD manages to stabilize above this region, 1.1900-1.1910 (round level, Fibonacci 78.6% retracement) could be seen as the next hurdle ahead of 1.2000 (psychological level). Looking south, a strong support area seems to have formed at 1.1730-1.1680 (Fibonacci 50% retracement, 100-day SMA, 200-day SMA). If EUR/USD drops below the lower limit of this range and starts using it as resistance, technical sellers could take action. In this case, 1.1660 (ascending trend line) could be seen as an interim support level before 1.1560 (Fibonacci 23.6% retracement).