Well, with markets now largely convinced that the Fed will head to the sidelines after last week's FOMC meeting decision, this will prove to be the first litmus test. You can argue that the US jobs report on Friday was a sort of test already but the inflation debate surely trumps that when you consider the prevailing circumstances.

US CPI

So, what can we expect from the US CPI data for April later in the day?

The estimates are showing headline inflation to increase by 0.4% on the month, with the annual reading to match the 5.0% reading that we saw in March. As for core prices, it is expected to increase by 0.4% on the month and an estimated annual reading of 5.5% - down slightly from 5.6% in the month before.

At this point, it is quite a simple push and pull narrative. A softer reading will give markets more reason to think that the Fed will head to the sidelines. Meanwhile, a stronger reading will complicate that sentiment and see some pushback to those expecting the Fed to pause.

Given the reaction function outlined above, you can sort of gauge how traders will react accordingly on both the dollar and risk fronts.

What will be tricky is a reading that comes in right on estimates but given that it doesn't hint that inflation may be hotter than anticipated, there is still reason for markets to hold their nerve.

Here's a breakdown of what the major banks are seeing for the headline annual reading:

  • Barclays 5.0%
  • BofA 5.0%
  • Citi 5.1%
  • Goldman Sachs 5.1%
  • HSBC 5.0%
  • JP Morgan 4.9%
  • Morgan Stanley 5.1%
  • Nomura 4.9%
  • UBS 5.0%
  • Wells Fargo 5.0%