💲USD weakens ahead of the CPI

The expectations point to easing inflationary pressures, but the end of the year may be turbulent

The US CPI report for September scheduled for 1:30 pm BST is a key point in today's economic calendar. Market expects US price growth to decelerate. Today's report is unlikely to change the Fed's hawkish stance, although a significant deviation from market expectations could affect next interest rate decisions at the end of this year and at the beginning of 2023. What markets expect from today’s report?

• Headline gauge is expected to drop to 8.1% YoY from 8.3% (the peak was reached in July at 9.1%, which would mean that inflation has already dropped by 1%)
• Monthly inflation is expected to increase by 0.2% MoM against the previous rise of 0.1% MoM
• Core CPI inflation is expected to rise to 6.5% YoY from 6.3% YoY in previous month (the peak took place in April at 6.5% YoY, Bloomberg indicates, however, that inflation could have increased in September even to 6.7% y / y)
• Core CPI inflation is to increase by 0.5% MoM, compared to 0.6% MoM rise in August

Energy prices are crucial for the headline reading

Within the last four months fuel prices in the US fell more than 25% from recent highs. Thanks to this, inflation may drop by 1% from the peak. However, if we look at the fuel prices in September, it turns out that they fell by only 1% throughout the month, therefore there is a chance that inflation will fall less than analysts expect. Additionally, many factors indicate that oil and possibly other energy prices will rise in the coming months, which may not be driving inflation towards the target, looking at Bloomberg's analysis.

Fuel prices fell slightly in September and are now at their highest level since mid-August. This may limit the decline in inflation in the near term. Source: Bloomberg

Additionally, Bloomberg points out that energy prices will rise until the end of the year, which could potentially force Fed to raise rates by 75 basis points not only in November but also in December. However, if inflation falls as expected, the hike in December could be much lower. Source: Bloomberg

Core inflation is expected to accelerate

Core inflation may reach a new high this month, which could further support FED hawkish rhetoric. Both shelter and rent equivalents in the US were growing very strongly in recent months. Bloomberg expects that in September these two figures will increase even 2-3% compared to the previous month. On the other hand, used car prices reached a peak which may in turn weaken core inflation reading.

How might the markets react?

Regardless of today's inflation reading, there is little chance that the Fed's bias will change. If headline inflation fell below 8%, while core inflation remained unchanged or even fell, this would be the first sign for the central bank that price pressure is actually easing in response to monetary action. However, this is not a base scenario, so a stock market rally is rather unlikely, and we should take into account the potential further strengthening of the dollar.

US500

US500 is once again trying to bounce back from the lowest levels since November 2020. Strong core inflation may push the index towards 3,500 pts. On the other hand, a significant drop in inflation could lead to a sentiment shift and spark an upward impulse towards 3700 pts. Source: xStation

EURUSD

The volatility on the EURUSD is very low this week, however another downward impulse towards recent lows around 0.9500 cannot be ruled out. As one can notice, key resistance is located at 0.9830, therefore a break above this level would indicate that the pair is approaching the bottom. Source: xStation5