- The U.S. Consumer Price Index is forecast to rise 2.6% year-over-year in August, a softer pace than the 2.9% increase in July.
- Annual core CPI inflation is expected to remain stable at 3.2%.
- Inflation data could alter the odds of a 50 basis point Fed rate cut in September and shake the US dollar.
The Bureau of Labor Statistics (BLS) will release the highly anticipated US (US) Consumer Price Index (CPI) inflation data for August on Wednesday at 12:30 GMT.
The US Dollar (USD) is set for intense volatility as any surprise in the US inflation report could significantly impact the market’s assessment of Federal Reserve (Fed) interest rate cut expectations in September.
What to expect in the next CPI data report?
U.S. inflation, as measured by the CPI, is expected to rise at an annual rate of 2.6% in August, up from a 2.9% increase reported in July. Core CPI inflation, which excludes volatile food and energy prices, is forecast to remain unchanged at 3.2% over the same period.
Meanwhile, both the CPI and core CPI are forecast to rise 0.2% month-on-month, matching the increase in July.
Ahead of the August inflation report, “We expect core CPI prices to remain largely subdued in August, posting a fourth consecutive gain of below 0.2% m/m. Services inflation will play a key role due to moderating rental prices,” TD Securities analysts said in a weekly report. “Headline inflation is also likely to remain subdued with energy prices returning to deflation. Our unrounded forecast for core CPI at 0.14% m/m suggests increased risks towards a rounded 0.2% increase.”
Following several consecutive soft inflation readings, Federal Reserve policymakers made clear they will shift their focus to the labor market amid growing signs of cooling. “We have a little more tolerance for an upside surprise in CPI as the longer arc shows inflation is coming down,” Chicago Fed President Austan Goolsbee said recently.
How could the US Consumer Price Index report affect EUR/USD?
Market anticipation of a 50 basis point Fed rate cut in September will be tested when September inflation data is released.
Following the mixed August jobs report, the probability of the Fed cutting the policy rate by 50 basis points at the next meeting fell to below 30% from nearly 50% at the beginning of the month, according to the CME Group’s FedWatch tool. The U.S. Bureau of Labor Statistics reported on Friday that Nonfarm Payrolls rose by 142,000 in August. This reading followed the increase of 89,000 (revised from 114,000) recorded in July and fell short of the market forecast of 160,000. On a positive note, the unemployment rate fell to 4.2% from 4.3% in July and annual wage inflation, as measured by the change in Average Hourly Earnings, rose to 3.8% from 3.6%.
Market positioning suggests that a significant deviation in CPI data will be needed for investors to reconsider a large rate cut next week. Should the monthly core CPI come in at 0% or in negative territory, the immediate reaction could reignite expectations of a 50 basis point cut and trigger a sell-off in the US Dollar (USD). On the other hand, a 0.3% or stronger increase could confirm a 25 basis point cut and help the USD remain resilient against its rivals. However, the fact that such a rate decision is already heavily priced in shows that the USD does not have much room for upside.
Eren Sengezer, Lead Analyst for the European Session at FXStreet, provides a brief technical outlook for EUR/USD and explains: “The short-term technical picture for EUR/USD highlights the lack of buying interest. The pair remains well below the 20-day Simple Moving Average (SMA) and the Relative Strength Index remains close to 50.”
“EUR/USD might face the first support at 1.1000, which is where the 38.2% Fibonacci retracement of the two-month uptrend that started in late June lies. Below this level, the 50-day SMA and the 50% Fibonacci retracement level form the next support area at 1.0950-1.0930. On the other hand, in case the pair overcomes the resistance of 1.1070-1.1080 (23.6% Fibonacci Retracement, 20-day SMA), it might target 1.1200 (end point of the uptrend) and 1.1275 (high of July 18, 2023) next.”
The Fed FAQs
Monetary policy in the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises interest rates, increasing borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year, at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC consists of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven regional Reserve bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a jammed financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital of maturing bonds in its portfolio to buy new bonds. It is usually positive for the value of the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
