The latest numbers on American inflationhave left the global financial community wondering. How many times will theFederal Reserve cut interest rates this year? With inflation at a four-yearlow, markets are tracking every hint and putting their probabilities togetherwith rising confidence. The April 2025 Consumer Price Index (CPI) figure,released on May 13 by the Bureau of Labor Statistics, was a stark departurefrom the inflation forecast and had the potential to determine the Fed's actionplan for the rest of the year.

Disinflation gathers pace

The April headline CPI rose just 0.2%, arecovery from the 0.1% fall in March. Far more significant, the year-on-yearinflation rate slowed to 2.3%, the lowest since February 2021. The readingrecords not just the fading away of pandemic-driven temporary price shocks butalso the growing potency of the Fed's two-year effort at aggressive monetarytightening.

Core CPI, stripping out volatile food andenergy prices, also held steady at 2.8% year-over-year. While still above theFed's 2% benchmark, the slowdown is the first sign that the most stubborncauses of inflation — services, housing, and wage-sensitive sectors — are nolonger accelerating.

Highlight April activity is a sharp 12.7%decline in egg prices and a 0.4% decline in "food at home" as bothcapture relief in pantry goods. Shelter costs, which make up more thanone-third of the CPI basket, however, rose 0.3%. This ongoing rise in housingcosts remains frustrating to the Fed as core inflation continues to be stickyeven as headline numbers ease.

Reading between the lines

At its May 7 session, the Federal Reservedecided to leave its target rate of 4.25%-4.50% in place, citing"cross-economic trends" and the still uncertain rate of coreinflation. Fed Chairman Jerome Powell made cautious but honest comments at hispress conference, casting aside any reservations when he stated that a rate cutis within reach, but not necessarily a given.

"We notice encouraging signs, buttoo soon to declare victory," Powell stated. "We need more confidencethat inflation is on track to a sustainable path to 2%."

The Fed release also mentioned newgeopolitical tensions, decelerating capital expenditures, and the emergingeffects of recent trade measures. Market participants interpret the Fed's wordsas "dovish", since futures prices signal one or two rate cuts through2025, and some speculative bets signal three.

The irony is not lost on veteraninvestors: whereas the Fed assures it uses data, markets increasingly depend onthe Fed. Each drop in the consumer price index, each report on labor markets,and each trade news headline are now used in figuring out the rate cut.

Trade tensions and tariffs

April also saw the introduction of a 10%across-the-board tariff applied to all US imports, as well as targetedincreases on Chinese consumer electronics, EV batteries, and foreign-madeautos. These protectionist measures, although geared toward reshoring criticalsupply chains and energizing domestic production, pose a complex inflationaryrisk.

So far, these tariffs have not muchimpacted consumer prices — perhaps due to long-term contracts, delayedpass-through effects, or offsetting cuts elsewhere. But experts expectinflation to return in the summer once businesses begin to raise their prices.

Substantial progress is the initialUS-China trade agreement in early May to reduce trade tensions. Under thisagreement, both nations agreed to roll back selected tariffs during Q3 2025. Ifit succeeds, the agreement will solve some of the tariff-sustained inflationand soften pressure on the Fed to be higher for longer.

Forex markets

A key rate cut could significantly affectthe market as a whole. Let's examine a few instruments closely.

USDollar fell to the critical supportarea of 61.8 Fibonacci, and rebounded. However, the price is ready to retestthis area again. At the same time, Parabolic SAR indicates the possibility ofgrowth, and CCI came out of the oversold zone.

● A break of the 99.000 support areawill drop the price to 95.500;

● A rebound from the support willbring USDollar back to 101.500 and further to 104.000;

XAUUSD continues to update historicalhighs, and the price is consolidating near 261.8 Fibonacci. The price crossedthe upper Bollinger line, indicating overbought.

● Consolidation above 3300 will openthe way to 4200;

● A rebound from resistance willdrop Gold to 2750 and on further decline to 2500;

It is currency traders' top worry whetherthe European Central Bank and the Bank of England will follow suit. If the Fedcuts spending but its counterparts do not, the dollar could fall further. Butif inflation stabilizes and the Fed procrastinates, the dollar's appreciationcould persist.

Meanwhile, the Japanese yen and Swissfranc, the safe-haven currencies, also increased modestly as expectations offalling interest rates cause the re-evaluation of risks. Volatility in theforeign exchange market is expected to increase during the summer.

How many cuts are coming?

With the April CPI numbers in hand andinflation seemingly front and center, everyone is waiting for the FederalReserve to act. It's no longer a question of whether the Fed will cut rates,but how often. The existing futures markets are already pricing in a 70% chanceof the first cut being in September, followed by a second in December, which isincreasingly likely.

But there is uncertainty. Sticky coreinflation, geopolitical uncertainty, the wild card path of tariffs, and astill-resilient labor market complicate the projection. The Fed's dual mandate— maximum employment and price stability — remains a tightrope. If hiring slowswhile inflation keeps falling, the Fed could move more aggressively. Ifinflation re-accelerates, cuts could be delayed into never-never land.

Conclusion

The April consumer price index report maybe the most significant reading of the year. He puts the US economy at a forkin the road: low inflation, steady jobs, and a central bank faced with patienceor preventive measures. The next couple of months will be a test of the Fed'smettle, market imagination, and the strength of international trade.

For the currency markets, volatility willbe an opportunity as well as a risk. As the Fed balances down the inflationrate and the dollar serves as a barometer of the world's economy, volatilitywill make both investors and policy makers prepare for a data-driven,diplomatically influenced, and decisions-yet-to-be-made second half of 2025