US inflation data could sway Fed rate outlook, impact USD valuation

Investors are closely monitoring the upcoming US Consumer Price Index (CPI) data release this Friday, which could significantly sway the Federal Reserve’s interest rate decisions and consequently affect the US Dollar’s strength in global markets.

The CPI is expected to show a 3.3% year-over-year increase for October, a slight decline from September’s 3.7% rise. Despite this anticipated dip, the Annual Core CPI inflation, which excludes volatile food and energy prices, is projected to hold steady at 4.1%. These figures are crucial as they offer insight into the country’s inflation trends and influence the Federal Reserve’s monetary policy.

The Federal Reserve has been maintaining a cautious approach, with officials indicating a preference to keep interest rates in the current 5.25%-5.5% range for the remainder of the year. The central bank’s strategy is highly data-dependent, and any significant deviation from expected inflation rates could prompt a reassessment of this stance.

Federal Reserve Chairman Jerome Powell recently voiced concerns at an International Monetary Fund event about whether current policies are restrictive enough to reduce inflation to the Fed’s 2% target. This uncertainty underscores the importance of this week’s inflation data in shaping market expectations.

In addition to domestic factors, international events such as the Israel-Hamas conflict have had an indirect influence on inflation perceptions by contributing to a 10% drop in oil prices last month, potentially easing some inflationary pressures.

Analysts from TD Securities suggest that core price inflation may have accelerated for the third consecutive month with a modest increase of 0.4% month-over-month in October. They anticipate that rising goods prices will be a contributing factor, while growth in housing costs may see a slowdown.

The service sector appears to be facing persistent input price pressures, as indicated by the slight decrease in the Prices Paid Index of the ISM Services PMI survey for October. Meanwhile, manufacturing input costs have continued their downward trend, offering mixed signals about overall inflationary pressures.

The pivotal moment will come this Friday when October’s Consumer Price Index inflation data is released at 13:30 GMT. Market participants are poised to interpret the core inflation reading as an indicator of potential shifts in Federal Reserve policy. A core inflation figure of 0.5% or higher could lead to expectations of more aggressive rate hikes, bolstering the US Dollar. On the flip side, a Core CPI increase of 0.2% or less might suggest no imminent change in Fed policy, potentially weakening the currency.

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