US core CPI data set to ease in August as markets reprice Fed September rate decision

• The US Consumer Price Index is expected to rise by 3.4% YoY in August, matching July’s increase.
• Annual core CPI inflation is expected to edge lower to 2.4% from 2.5%.
• Inflation report could significantly influence the market pricing of next week’s Fed decision and the USD performance.

The US Bureau of Labor Statistics (BLS) will publish the August Consumer Price Index (CPI) data on Friday. The report is expected to show a small decline in annual core inflation. Any divergence from analysts’ estimates could influence the Federal Reserve’s (Fed) policy outlook and impact the US Dollar’s valuation.

The monthly CPI is forecast to rise by 0.4%, following the 0.1% increase recorded in July, while the annual reading is seen holding steady at 3.4%. Core CPI figures, which exclude volatile food and energy prices, are expected to post an increase of 0.2% and 2.4%, on a monthly and yearly basis, respectively. 

Following a nearly 22% surge in July, Crude Oil prices held steady in August, ending the month virtually unchanged as the US and Iran keep failing to reach a solution to restore naval activity in the Strait of Hormuz, while avoiding further escalation in military action.

US core CPI data seen contained as goods weakness offsets firm services

According to economists at TD Securities, the upcoming US CPI report should show that “underlying inflation stayed under control in August,” with “the core expected to rise 0.19% m/m.” They expect “the services segment [to] be the main driver of inflation, while core goods prices likely acted as a drag, posting a modest m/m drop.” On an annual basis, TD Securities projects that “core CPI rose 2.3% on a y/y basis, down 10 bps vs July, while headline inflation likely stayed unchanged at 3.4% y/y.” The bank cautions that “risks to our forecasts [are] skewed to the upside” given their assumption of “a number of large price declines in tariff-exposed goods categories.” 

How could the US Consumer Price Index report affect EUR/USD?

While speaking at the Reuters NEXT Newsmaker event in Washington last week, Federal Reserve (Fed) Governor Christopher Waller outlined a conditional reaction function. He explained that a steady policy rate is preferred if August inflation shows continued progress, yet even a modest upside surprise could trigger a “small adjustment” higher. While Waller reiterated that inflation remains “significantly elevated” and that it may not take much acceleration to justify a hike, he acknowledged an “encouraging” disinflation and a solid growth and labor backdrop.

Although the CME Group FedWatch Tool’s probability of a 25 basis points (bps) increase in the interest rate at the upcoming policy meeting declined slightly below 50% following his comments, the upbeat employment data for August, published one day later, reaffirmed healthy labor market conditions and caused markets to reassess the odds of a tightening step. Currently, there is about a 70% chance of a Fed rate hike next week.

A weaker-than-expected increase in the monthly core CPI, below the 0.2% forecast, could cause market participants to scale back bets on a rate increase and trigger an immediate USD selloff, opening the door for a leg higher in EUR/USD heading into the weekend. Conversely, a reading of 0.3% or higher could boost the USD and put EUR/USD under bearish pressure. 

Strategists at Brown Brothers Harriman (BBH) emphasize that Friday’s US August CPI release is “the main market driver that will decide the Fed’s September 16 rate decision.” They argue that “a hot CPI print would all but seal a September hike and underpin a firmer USD,” whereas “a cooler reading would strengthen the case for a hold and leave USD vulnerable to a dovish Fed repricing.” However, BBH cautions that “even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs,” noting that tightening by other major central banks is limiting policy divergence. 

At the same time, DBS Group Research notes that, despite recent volatility, “there are no signs that price pressures are broadening out.” The bank argues that the upcoming US CPI release will be pivotal for near-term Fed expectations, suggesting that “CPI and core CPI of 0.4% MoM sa and 0.3% MoM respectively may well be the minimum that would nudge market participants to increase the odds of imminent tightening.” By contrast, DBS believes that “a 0.2% print in both figures would probably see the odds of imminent tightening fall closer to zero.”  

Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for EUR/USD:

“EUR/USD clings to a bullish stance in the short-term technical outlook, with the Relative Strength Index (RSI) indicator on the daily chart holding above 50 and the pair trading well above the 100-day and 50-day Simple Moving Averages (SMA). The 200-day SMA, currently located at 1.1635, aligns as a pivot level. Once the pair confirms that level as support, technical buyers could remain interested. In this scenario, 1.1700 (upper arm of the Bollinger Band, static level) could be seen as an interim resistance level ahead of 1.1800 (static level).”

“On the downside, a relatively wide support region seems to have formed at 1.1560-1.1520, where the 100-day SMA, lower arm of the Bollinger Band and the 50-day SMA are located. If the pair retreats below this region, 1.1460 (static level) could be seen as the next support level before 1.1350 (static level).”