The US Consumer Price Index (CPI) for September is expected to show a year-on-year increase of 2.3%, which is slightly slower than the 2.5% rise seen in August. Meanwhile, core CPI inflation, which excludes the more volatile food and energy prices, is forecast to remain steady at 3.2% annually. This upcoming inflation report could shake up the US Dollar (USD) as it may alter market expectations regarding future Federal Reserve (Fed) decisions.
The Bureau of Labor Statistics will release this much-anticipated CPI data on Thursday, and traders are bracing for volatility. Any surprises in the report could have a significant impact on how the market views the Fed’s interest rate plans for the remainder of the year.
What to Expect from the CPI Report, Inflation in the US is projected to rise by 2.3% annually in September, slightly down from the 2.5% growth in August. Core inflation is expected to stay the same at 3.2%. On a monthly basis, both CPI and core CPI are forecast to edge up by 0.1% and 0.2%, respectively.
According to TD Securities analysts, they expect core inflation to have slightly cooled, with a monthly gain of 0.24%, down from 0.28% in August. The headline inflation rate is also expected to slow, largely due to a drop in energy prices. They also note that while core goods prices may have added to inflation for the first time in seven months, housing costs likely eased, bringing down core services inflation.
Recently, Fed Governor Adriana Kugler expressed her willingness to support more rate cuts if inflation continues to decline as expected. On the flip side, St. Louis Fed President Alberto Musalem cautioned that easing policy too much, too quickly, could be riskier than holding back a bit, as it could damage the Fed’s credibility and harm future economic activity.
Impact on EUR/USD After the Fed cut rates by 50 basis points in September, the market now expects a smaller 25 bps reduction at the next meeting. A 50 bps cut has been completely ruled out for November, according to the CME Fed-Watch Tool. Strong employment data from September, including the addition of 254,000 jobs—far surpassing the expected 140,000—combined with a drop in the unemployment rate to 4.1%, has lessened fears of a weakening labor market. This is why it would take a major miss in the CPI report for investors to reconsider a larger rate cut.
If core CPI comes in flat or negative, it might revive expectations for a 50 bps cut, triggering a sell-off in the USD. However, if the data meets or exceeds the expected 0.2% increase, a 25 bps cut is likely to be confirmed, though the USD may not have much room to rise further.
In terms of technical analysis, EUR/USD shows weak buying interest, with the Relative Strength Index (RSI) remaining below 50. First support for EUR/USD could be found around 1.0930, with the next bearish target at 1.0870 if that level fails. On the upside, interim resistance sits at 1.1000, with the potential to extend to 1.1100 if the pair flips this level into support.
