US consumer price index expected to ease further, closer to Federal Reserve’s inflation target

• The US Consumer Price Index is expected to rise 2.3% from a year ago in September, a weaker pace than August’s 2.5% rise.
• Annual core CPI inflation is expected to hold steady at 3.2%.
• The inflation report could increase USD volatility by changing market expectations about the Fed’s outlook.

The Bureau of Labor Statistics (BLS) will release the highly anticipated United States (US) consumer price index (CPI) inflation data on Thursday at 12:30 GMT.

The US dollar (USD) is bracing for intense volatility as any surprise in the US inflation report could significantly impact market pricing for the Federal Reserve’s (Fed) interest rate outlook for the rest of the year.

What to expect in the next CPI data report?

US inflation, as measured by the CPI, is expected to rise at an annual rate of 2.3% in September, down from the 2.5% increase reported in August. Core CPI inflation, which excludes volatile food and energy prices, is expected to remain unchanged at 3.2% over the same period.

Meanwhile, CPI and core CPI are expected to rise by 0.1% and 0.2% respectively on the month.

September Inflation Report Preview “Our forecasts for the September CPI report suggest that core inflation lost modest momentum, posting a gain of 0.24% m/m after advancing a slightly stronger 0.28% in August,” TD Securities analysts said in a weekly report, adding:

“Headline inflation is likely to have lost significant momentum as the energy component will once again provide major relief. The details should show that core goods prices added to inflation for the first time in seven months, while housing inflation likely cooled modestly, dragging core services inflation lower.”

Speaking on the Fed’s policy outlook recently, Fed Governor Adriana Kugler said she would support a further rate cut if inflation progress continues as expected. On a cautious note, Fed President St. Louis, Alberto Musalem argued that the costs of relaxing policy too much too soon were greater than the costs of relaxing too little too late. “This is because sticky or higher inflation would pose a threat to the Fed’s credibility and future employment and economic activity,” he further argued.

How could the US CPI report affect EUR/USD?

Following the Fed’s decision to cut its policy rate by 50 basis points (bps) at its September meeting, investors expect the US central bank to reduce easing, opting for a 25 basis point cut to the next meeting. According to the CME FedWatch tool, the likelihood of a 50 bps rate cut in November is completely out of the question for now.

Upbeat September employment data eased fears of a labor market slowdown, prompting investors to refrain from pricing in a big rate cut. The US Bureau of Labor Statistics reported that non-farm payrolls (NFP) rose by 254,000 in September, beating market expectations of 140,000 by a wide margin. Additionally, the unemployment rate fell to 4.1 percent from 4.2 percent over the same period, while annual wage inflation, as measured by the change in average hourly earnings, rose to 4 percent from 3.9 percent in August.

It will take a significant miss in inflation data for investors to reconsider a big rate cut at the next policy meeting. If the monthly core CPI is at 0% or in negative territory, the immediate reaction could revive expectations for a 50bps cut and trigger a US dollar (USD) selloff. On the other hand, a reading at or above market expectations of 0.2% should reaffirm a 25bps cut. However, market positioning suggests that the USD does not have much room to move higher.

Eren Sengezer, European Session Lead Analyst at FXStreet, provides a brief technical outlook for EUR/USD and explains: “The short-term technical chart of EUR/USD is showing a lack of buyer interest, with the Relative Strength Index (RSI) on the day by day. graph remains well below 50.”

“EUR/USD could face first support at 1.0930, where the 50% Fibonacci retracement of the June-August uptrend meets the 100-period simple moving average (SMA). If this support fails, 1.0870 (61.8% Fibonacci retracement, 200-day SMA) could be seen as the next bearish target before 1.0800 (78.6% Fibonacci retracement). On the other hand, intermediate resistance lines up at 1.1000 (38.2% Fibonacci retracement). Once the pair turns this level into support, it can extend its recovery towards 1.1050-1.1070 (50-day SMA, 23.6% Fibonacci retracement) and 1.1100 (20-day SMA).