US CPI Preview: Will Inflation Fall Enough to Put a Fed Hike in Doubt?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 3.9% y/y headline inflation, 2.8% y/y core inflation
• With traders pricing in 80% odds of a Fed rate hike next month, so only a notable downside surprise would be likely to drive significant market volatility.
• EUR/USD is sitting directly in the middle of its 5-week, 200-pip consolidation range ahead of the CPI report.

When is the US CPI report?

The US CPI report for October will be released at 8:30ET (13:30 GMT) on Tuesday, November 10.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI at +0.3% m/m (3.9% y/y) and Core CPI at +0.2% m/m (2.8% y/y).

US CPI Forecast

Traders are back on inflation watch in the wake of Friday’s stronger-than-expected +165K NFP print, a report that also showed average hourly earnings running above the recent average at + 0.4% m/m. With recent inflation reports running well above the Fed’s 2% target and arguably accelerating to the topside, traders are discounting a high probability that the central bank will be forced to raise interest rates again before the end of the year.

As the chart below shows, Fed Funds Futures markets are currently pricing in about a 4-in-5 chance that the central bank will raise interest rates at its meeting next month, suggesting that only a downside surprise in inflation would be a major market mover:

Source: CME FedWatch

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As we noted above, has remained stubbornly above the Fed’s 2% target for a half-decade already, and leading indicators are suggesting it could rise further from here:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports edged lower but remained historically elevated, raising the risk of a higher headline inflation reading if the historical correlation holds. As usual, the “core” reading, which excludes food and energy prices, as well as the so-called “supercore” (core services excluding housing) readings will be more impactful for the Fed and markets.

As we noted earlier, a CPI reading that comes in above, or even at, consensus expectations this month would keep the FOMC on track to hike, so only a notable downside surprise would be likely to drive significant market volatility.

US Dollar Technical Analysis – EUR/USD Daily Chart

Source: TradingView, StoneX

Turning our attention to the greenback, EUR/USD is sitting directly in the middle of its 5-week, 200-pip consolidation range ahead of the CPI report. The pair’s steep downtrend from September appears to be seeing a correction through time, rather than through price, with the 14-day RSI gradually reverting from oversold territory back to neutral.

A confirmed downside breakdown through support at 1.1100 would reconfirm the bearish momentum, potentially opening the door for another leg lower toward 1.1000 in time; whereas a legitimately cooler-than-anticipated CPI reading that throws the December Fed decision back into doubt could take the pair back to resistance at the top of the consolidation zone near 1.1270.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX