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.”
Economic Indicator
Consumer Price Index ex Food & Energy (MoM)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The MoM print compares the prices of goods in the reference month to the previous month.The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.
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).”
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.