The NFP report released on Friday has transformed the perception of a rate hike by the Federal Reserve in June from unrealistic to tangible possibility. Strong inflation risks emerged from the data, with the unemployment rate reaching a multi-year low of 3.4% and monthly wage growth heating up to 0.5%. With prior confidence in the Fed's pause for June nearly unquestioned, there is now significant room for expectations to tilt towards more hawkish outcomes. Market participants are currently factoring in the risk that the upcoming CPI report for April, which holds greater significance in this narrative, will confirm sustained inflationary pressures and pose a perplexing challenge for the Fed. For such an outcome to materialize, core inflation in April would need to surpass the 5.5%-mark, further fuelling concerns that the downward trend may have lost momentum:

Investors are adjusting their strategies to account for the potential impact of a strong CPI, reducing their exposure to risk assets and favouring the dollar. This shift is evident in the downward movement of major EU stock indexes and US futures and the uptick in the dollar. The dollar index is on the brink of breaking through a medium-term sloping resistance line, and if successful, it could pave the way for an accelerated upward movement and a test of the global bearish channel line (102.20/30 on DXY):

Given the circumstances, EURUSD could easily decline to 1.09 or lower if the April CPI surpasses expectations, as it would heighten the likelihood of a Fed rate hike in June. However, alongside this development, market prices will also reflect the risks of potential upheavals in the US banking sector and the tightening of credit conditions in response to these risks. These factors are bound to have negative implications for risk appetite.