US CPI data set to show inflation accelerated 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.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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