- US CPI inflation expected to pull lower in October
- Is the Fed’s tightening strategy working?
- Dataset to be released on Tuesday at 13:30 GMT
Inflation remains a priority
The US dollar fell by 1% against six major currencies after traders saw a slowdown in hirings and concluded that the Fed won’t raise rates again. At the same time, a group of investors became more confident that signs of economic weakness might motivate rate cut talks in 2024, although the Fed chief, Jay Powell, kept that scenario out of the radar during November’s FOMC policy meeting.
Monetary tightening to fight inflation has been a story for more than a year, and this may not change soon as the Fed is not convinced that inflation is on a sustainable path towards the central bank’s 2.0% target. Growth in consumer prices has eased significantly from the 2022 multi-year highs, falling as low as 3.0% y/y in June before edging up to stabilize around 3.7%. The next CPI update is scheduled to take place on Tuesday and investors will look at whether progress has halted particularly on the core measure, which is a better proxy of the general inflation trend.
According to forecasts, the monthly headline CPI change is expected to slow down to 0.1% from 0.3% previously, while the core CPI is forecast to stay steady at 0.3% m/m.
The core CPI inflation, which excludes food and energy prices, has been slowly decreasing over the past six months and reached a two-year low of 4.1% in September. In October, the ISM services PMI survey found that price pressures remained within the expansion territory, with businesses stating that increased labor costs were the main cause of elevated prices.
Is additional tightening necessary?
Additional tightening may be the easiest way to cool inflation, but its impact on the economy and price pressures has been a puzzle so far.
Rising personal consumption, a low unemployment rate, and low savings indicate that higher interest rates didn’t dampen demand. Of course, this does not mean that monetary tightening was not necessary. Otherwise, inflation would have been a bigger headache as a weak dollar would have made import prices more painful to consumers.
Nevertheless, effects from monetary tightening will apparently become more obvious at some point, perhaps with a bigger lag if real wage growth turns positive in the coming months and consumers remain confident that their jobs are secured.
Meanwhile, supply-side effects might keep adding pressure on inflation, especially in the housing sector. If the Fed shuts the door to additional rate hikes but retains its higher for longer guidance, demand for loans and therefore for houses would probably decline, likely causing a negative spiral in prices.
The Fed’s latest economic projections for 2024 pointed to a softer GDP growth of 1.5% and a weaker inflation of 2.6%.
EURUSD levels to watch
As regards the impact on the US dollar, traders could sell the currency if CPI measures resume downleg, boosting confidence the Fed has reached the terminal rate. Looking at EURUSD, the pair might attempt to crawl above its 200-day exponential moving average (EMA) at 1.0730 and pierce the bullish channel on the upside at 1.0763.
Alternatively, if inflation keeps trending up, suggesting the battle for price stability might be trickier, investors might see another rate hike on the horizon. EURUSD could correct lower on the back of a stronger dollar, though only a slide below 1.0600 would violate the positive trend in the short-term picture.
