Inflation Relief Fuels Risk-On Rally: Why the Fed Pause is a Buy Signal for Equities and a Sell Signal for the Dollar

The April U.S. CPI report delivered a critical miss to the downside, printing at 2.3% year-over-year—well below the 2.4% estimate. This marks the slowest 12-month inflation rate since early 2021 and solidifies the case for a prolonged Federal Reserve pause. The data has set off a ripple effect across markets, favoring risk assets while weakening the U.S. dollar’s technical footing. Here’s why investors should position aggressively for this shift.

The Fed’s Pause is Now a Near-Certainty

The CPI print underscores the fading urgency for further rate hikes. The core CPI (excluding food and energy) rose just 0.2% month-over-month in April, with its 12-month rate holding at 2.8%—the smallest annual increase since late 2021. Key drivers of moderation include:
- Energy prices falling 3.7% annually, led by plummeting gasoline costs (-11.8%).
- Shelter costs cooling to a 4.0% annual pace, the slowest since 2021.

This aligns with Fed Chair Powell’s emphasis on “data dependence.” With May’s CPI likely to show further easing, the Fed’s next move is now firmly on hold. The CME FedWatch Tool now prices a 0% chance of a June hike, with no rate increases expected through year-end.

The Dollar’s Technical Breakdown Signals More Weakness Ahead

The CPI miss amplified pressure on the U.S. dollar, which has long relied on rate differentials for support. The EUR/USD pair breached 1.1300, a key technical level, and is now targeting 1.1500 as traders bet on a prolonged Fed pause.

The dollar’s decline is structural:
- Lower U.S. rates reduce carry trade吸引力: The eurozone’s 3.5% deposit rate now outperforms the Fed’s 5.0% funds rate less inflation (EUR inflation is at 6.0%, vs. 2.3% in the U.S.).
- Risk-on flows favor non-dollar assets: A weaker dollar makes commodities and emerging markets more attractive, further pressuring the USD.

Rate-Sensitive Sectors Lead the Rally

The Fed’s pause is a tailwind for equities, particularly technology and equity indices, which thrive in low-rate environments.

• Tech stocks: Lower discount rates boost valuations for growth companies. The NASDAQ Composite has surged 12% year-to-date, with AI-driven firms like NVIDIA (NVDA) leading gains.
• Equity indices: The S&P 500’s 10% YTD rally is partly fueled by falling rate expectations.

Trade the Fed Pause with a Tactical Strategy

Go Long Equities, Short the Dollar
1. Long S&P 500 ETFs (SPY): Equity markets are pricing in a “Goldilocks” scenario of growth without inflation.
2. Short USD via EUR/USD: Target the 1.1500 level, with stops below 1.1200.
3. Rotate into Tech: FANG+ stocks (Meta, Amazon) and semiconductors (ASML, TSM) benefit from falling bond yields.

Risks and the Path Ahead

While the Fed’s pause is likely, two risks remain:
1. Unexpected wage growth: A pickup in hourly earnings could reignite inflation.
2. Geopolitical shocks: Tariffs or supply chain disruptions could reverse energy/food deflation.

But for now, the data is clear: lower inflation = higher risk assets, weaker dollar. This is a multi-month trend. Act now.

Final Call: The Fed’s pause is here. Deploy capital into equities and short the dollar—this is a structural shift favoring growth and global risk-on momentum.