US core CPI data set to ease in August as markets reprice Fed September rate decision

The US Bureau of Labor Statistics will release the August Consumer Price Index data on Friday, which is anticipated to reveal a slight decrease in core inflation. The report's divergence from market predictions could affect the Federal Reserve's policy stance and the US Dollar's value. Analysts anticipate a 0.4% monthly increase in CPI, following the 0.1% rise in July, with a steady annual rate of 3.4%.

Core CPI, excluding volatile food and energy prices, is expected to grow by 0.2% monthly and 2.4% yearly. Following a 22% surge in July, Crude Oil prices remained relatively stable in August, ending the month without substantial change, as tensions between the US and Iran prevented a resolution to restore naval activity in the Strait of Hormuz.

Economists at TD Securities predict that the upcoming CPI report will indicate that "underlying inflation stayed under control in August," with the core index rising by 0.19% month-over-month. They expect the services sector to be the primary driver of inflation, while core goods prices may dampen growth, posting a modest decline on a monthly basis.

On an annual basis, TD Securities projects a 2.3% core CPI increase, slightly lower than July's rate, while headline inflation likely remains unchanged at 3.4%. Federal Reserve Governor Christopher Waller expressed a conditional reaction function, stating that a steady policy rate would be favored if August inflation continues to improve, but a modest upside surprise might warrant a small rate increase.

While Waller reiterated that inflation remains significantly elevated and could prompt further rate hikes, he acknowledged "encouraging" disinflation and a robust growth and labor environment. The CME Group FedWatch Tool's probability of a 25 basis points rate increase in the upcoming meeting dropped slightly below 50% following Waller's remarks, yet positive employment data for August and reassessed tightening odds led markets to adjust their expectations.

A weaker-than-expected core CPI increase below 0.2% could prompt market participants to reconsider a rate increase, potentially causing a USD selloff and benefiting EUR/USD. Conversely, a reading of 0.3% or higher could strengthen the USD and put EUR/USD under bearish pressure. Strategists at Brown Brothers Harriman argue that the August CPI release will be the key market driver influencing the Fed's September 16 rate decision.

They suggest that a strong CPI print would virtually guarantee a September hike and bolster the USD, whereas a weaker reading would support the case for a pause and leave the USD vulnerable to a dovish Fed reevaluation. However, BBH warns that even if a September hike is inevitable, the USD is unlikely to reach new cyclical highs due to tightening measures by other major central banks.

DBS Group Research emphasizes that despite recent price volatility, there are no indications of broadening inflation pressures. The bank suggests that a core CPI reading of 0.4% month-over-month and 0.3% monthly may be the minimum to nudge market participants toward imminent tightening. DBS believes that a 0.2% print in both figures could significantly lower the odds of an immediate rate adjustment.

European Session Lead Analyst Eren Sengezer provides a technical outlook for EUR/USD, noting that the pair trades above the 100-day and 50-day Simple Moving Averages, with the Relative Strength Index holding above 50. The 200-day SMA, at 1.1635, acts as a pivot level. If EUR/USD confirms the support level, technical buyers may remain active, targeting 1.1700 (upper Bollinger Band arm) and 1.1800 (static level) as interim resistance.

On the downside, a retreat below 1.1560-1.1520 could trigger a move to 1.1460 (static level) as the next support, followed by a potential slide to 1.1350 (static level).