US Consumer Price Index expected to rise in October as traders dial back Fed rate cut bets
- The US Consumer Price Index is set to rise 2.6% YoY in October, faster than September’s 2.4% increase.
- Annual core CPI inflation is expected to remain at 3.3% in October.
- The inflation data could significantly impact the market’s pricing of the Fed’s interest rate outlook and the US Dollar value.
The Consumer Price Index (CPI) inflation data from the United States (US) for October, published by the Bureau of Labor Statistics (BLS), is highly anticipated and slated for release on Wednesday at 13:30 GMT.
The US Dollar (USD) is set to rock on intense volatility likely to be spurred by the US inflation report, which could significantly impact the market’s pricing of the Federal Reserve (Fed) interest rate outlook for the coming months.
What to expect in the next CPI data report?
As measured by the CPI, inflation in the US is expected to increase at an annual rate of 2.6% in October, a tad higher than the 2.4% growth reported in September. The core annual CPI inflation, excluding volatile food and energy prices, will likely remain at 3.3% in the same period.
Meanwhile, the monthly CPI and the core CPI are forecast to rise 0.2% and 0.3%, respectively.
Previewing the October inflation report, TD Securities analysts said: “Inflation readings should remain somewhat firmer than the Fed would prefer in the near-term, reversing some recent improvement in the pace of price changes.”
“We look for headline CPI to rise 0.29% MoM while core inflation rises at a firmer 0.32% MoM pace. This will leave the annual pace of CPI edging up to 2.6% YoY for the headline and remaining steady at 3.3% YoY for core,” they added.
Following the November policy meeting, Fed Chairman Powell maintained that the central bank remains committed to its gradual easing path, adding that the outcome of the US presidential election won’t affect policy decisions in the near term. The Bank seemed determined to defend its independence from newly elected US President Donald Trump, as Powell clearly stated that he would not resign if asked to do so.
How could the US Consumer Price Index report affect EUR/USD?
Trump’s policies on immigration, tax cuts and tariffs could put upward pressure on inflation, calling for higher interest rates and supporting the US Dollar. However, the impact of these policies on the economy and inflation are likely to be felt only in the medium to long term.
Thus, amidst softening labor market conditions and the progress in disinflation, the October inflation report will play a pivotal role in offering fresh hints on the Fed’s next policy move. Markets are pricing in a 67% probability that the Fed will lower rates by 25 bps in December, according to the CME Group’s FedWatch Tool, down from about 80% seen at the start of this month.
The labor data published by the BLS on November 1 showed that Nonfarm Payrolls (NFP) increased by 12,000 last month, following a downward revision to the prior two months. The Unemployment Rate held steady at 4.1% in October. Meanwhile, wage inflation, as measured by the change in the Average Hourly Earnings, rose to 4% over the year in October from 3.9% in September.
A big downside surprise in the US annual headline and core inflation prints could cement expectations of a December Fed rate cut. If the monthly core CPI comes in at 0% or enters negative territory, markets will likely double down bets for an aggressive Fed easing cycle and trigger a USD sell-off. On the other hand, Fed hawks would return and push back against expectations for a rate cut in December on hotter-than-expected CPI readings.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture points to a likely buyer exhaustion as the Relative Strength Index (RSI) indicator on the daily chart prods the oversold territory at 30.”
“EUR/USD could meet the initial demand area at the 1.0550 psychological level, below which the November 1, 2023, low of 1.0517 will be challenged. Additional declines will target the 1.0500 round figure. Conversely, interim resistance aligns at the November 11, 2024, high of 1.0728. If buyers recapture the latter sustainably, the next resistance at the 21-day Simple Moving Average (SMA) at 1.0810 will be tested.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger 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 may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 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 named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.