🔴EURUSD muted before US CPI!

💲 Dollar is bracing for significant fluctuations following the US inflation release at 1:30 pm BST

Will a high inflation reading mislead the market ahead of the Fed decision? Report at 2:30 PM

• The US CPI inflation report for August will be published today at 2:30 PM.
• A significant rebound in headline inflation and a high monthly reading are expected.
• However, the core inflation is expected to continue declining, with the monthly core inflation being "aligned" with the Fed's 2% inflation target.
• This will be the last significant macroeconomic reading before the Fed's decision next week. The inflation for August is expected to be noticeably higher.

Expectations regarding today's reading:

• The CPI inflation is expected to increase to 3.6% year-on-year from a level of 3.2% year-on-year.
• Monthly inflation is expected to rebound by 0.6% month-on-month, compared to a previous increase of 0.2% month-on-month. This is associated with oil prices.
• The core inflation is expected to register another decline to 4.3% year-on-year from a level of 4.7% year-on-year.
• Monthly core inflation is expected to increase by 0.2% month-on-month, similar to the month before, being consistent with the Fed's 2% target for core inflation, annualizing monthly data.
• According to Bloomberg, deflationary factors will be cars and rents (falling car prices and declining growth of housing costs).
• The Fed model from Cleveland, however, suggests a stronger monthly inflation increase at a level of 0.8% month-on-month, which could lead to a dollar rally and increase investors' expectations regarding a possible Fed hike next week.
• Bloomberg points to a potential higher impact of energy price increases in the summer due to high consumption related to air conditioning.
• Bloomberg also sees the potential for a rebound in monthly service inflation, which would be associated with high demand for hotels and restaurants in the largest cities in the US, where large concerts of stars like Taylor Swift and Beyonce took place. Interestingly, the recent surprise increase in inflation in Sweden is attributed to concerts and associated services.

The monthly CPI inflation increase will likely be the highest since mid-2022, but it is important to note that this will be related to seasonal factors and a clear rebound in oil prices in the previous month, which will also continue in September. The market may interpret today's headline inflation reading as an opportunity for a Fed hike, but one must remember the recent slowdown in the job market and a significant drop in core inflation. Only a clearly higher core inflation reading compared to expectations could change the mood prevailing in the Federal Reserve. At the moment, market expectations do not indicate that the Fed will raise interest rates next week, although it cannot be ruled out later this year.

Leading indicators for inflation, such as gasoline prices in the US and the price index from the ISM report for services, indicate that the next two inflation readings should be higher. However, the rebound in inflation will also result from base factors. It is worth remembering that the peak of inflation at the level of 9.1% year-on-year took place in June 2022, and in August 2022 inflation was 8.3% year-on-year.

EURUSD

EURUSD is consolidating at current levels without major movements. Investors are awaiting CPI readings, so until that time, one should not expect greater volatility. However, if the CPI turns out to be above expectations, it could cause a sharp strengthening of the dollar and a decline in the EURUSD currency pair. Conversely, lower readings can nullify the chances of a Fed interest rate hike at the next meeting and lead to increases in EURUSD. Source: xStation 5