At 2:30 pm we will learn the consumer inflation report from the United States. Will inflation surprise like PPI and change the dollar's recent stance?
- Market expectations indicate a drop in inflation after the recent rebound to 3.6% y/y from the level of 3.7% y/y for September.
- Core inflation is expected to fall to 4.1% y/y from 4.3% y/y.
- Fuel prices continued to rebound in September, and we observed a clear increase in car prices, which may result in a negative surprise with a higher reading.
- At the same time, rents and shelter costs are still subject to disinflation.
Can today's inflation reading change the Fed's plans?
CPI inflation is one of the key readings from the Fed's side. Of course, the Fed places more emphasis on core CPI inflation, not to mention PCE inflation. However, the Fed has already noticed the inflation reversal trend, although this may be disturbed by some factors, such as a clear rebound in fuel prices, a rebound in car prices, or a stronger rebound in producer inflation. There is a significant risk that with a return to rising oil prices and reaching prices of 100 USD per barrel, the CPI may exceed 4.0% by the end of this year. It's worth mentioning that monthly inflation increased by 0.6% m/m in August. Increases above 0.2% m/m are not consistent with maintaining the inflation target, and increases above 0.4% m/m may result in a larger price rebound at the turn of 2023/2024.
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PPI inflation rebounded despite expectations of a decline. Will this mean a surprise with CPI inflation? Source: Bloomberg Finance LP, XTB
Looking at fuel prices, CPI inflation may continue to rise by the end of this year, although with an average inflation scenario of 0.4% m/m by the end of this year, the 4.0% y/y level for CPI inflation will not be exceeded. However, it is worth remembering that inflation increased by as much as 0.6% m/m in August. Source: Bloomberg Finance LP, XTB
What does the Fed say?
In the last 2 weeks, we could hear many voices about the lack of hurry and emphasis that rates do not have to rise anymore. The recent yield rally, which tightened financial conditions, is responsible for this. Additionally, a fairly large aversion to hikes was visible in the FOMC minutes. Of course, the Fed will want to keep interest rates unchanged for a longer period, but stopping hikes would bring relief to many markets at least in the short term. However, another strong monthly inflation increase, above 0.4% m/m (both for regular and core), may change the Fed's expectations. Today, readings are expected in both cases at 0.3% m/m.
How will EURUSD react?
The EURUSD pair has at least temporarily ended strong declines in early October, and a potential 'Head and Shoulders' pattern has been determined, and the neckline has finally been broken, suggesting even reaching around 1.0770. On the other hand, we also have a barrier at the level of 1.0640. However, there is a high chance of readings higher than expected, and in such a case, the last uptrend line will be crucial. Its breakthrough may bring EURUSD to test the level of 1.0550, which will negate the 'Head and Shoulders' pattern or breakout from the triangle.
Source: xStation5
