The next couple of months will be a test of the Fed's mettle, market imagination, and the strength of international trade.

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

The April headline CPI rose just 0.2%, a recovery from the 0.1% fall in March. Far more significant, the year-on-year inflation rate slowed to 2.3%, the lowest since February 2021. The reading records not just the fading away of pandemic-driven temporary price shocks but also the growing potency of the Fed's two-year effort at aggressive monetary tightening.

Core CPI, stripping out volatile food and energy prices, also held steady at 2.8% year-over-year. While still above the Fed's 2% benchmark, the slowdown is the first sign that the most stubborn causes of inflation -- services, housing, and wage-sensitive sectors -- are no longer accelerating.

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

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

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

The Fed release also mentioned new geopolitical tensions, decelerating capital expenditures, and the emerging effects of recent trade measures. Market participants interpret the Fed's words as "dovish", since futures prices signal one or two rate cuts through 2025, and some speculative bets signal three.

The irony is not lost on veteran investors: whereas the Fed assures it uses data, markets increasingly depend on the 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.

April also saw the introduction of a 10% across-the-board tariff applied to all US imports, as well as targeted increases on Chinese consumer electronics, EV batteries, and foreign-made autos. These protectionist measures, although geared toward reshoring critical supply chains and energizing domestic production, pose a complex inflationary risk.

So far, these tariffs have not much impacted consumer prices -- perhaps due to long-term contracts, delayed pass-through effects, or offsetting cuts elsewhere. But experts expect inflation to return in the summer once businesses begin to raise their prices.

Substantial progress is the initial US-China trade agreement in early May to reduce trade tensions. Under this agreement, both nations agreed to roll back selected tariffs during Q3 2025. If it succeeds, the agreement will solve some of the tariff-sustained inflation and soften pressure on the Fed to be higher for longer.

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

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

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

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

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

● Consolidation above 3300 will open the way to 4200;

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

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

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

With the April CPI numbers in hand and inflation seemingly front and center, everyone is waiting for the Federal Reserve 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% chance of the first cut being in September, followed by a second in December, which is increasingly likely.

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

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

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