Forex Today: US Dollar weakens ahead of US CPI inflation data

On Wednesday, October 14, the US Dollar Index (DXY) slipped to around 102.10 due to a decline in oil prices and a decrease in US bond yields. Investors are eagerly awaiting the release of the US September Consumer Price Index (CPI) inflation data, which could provide insight into the Federal Reserve's (Fed) potential interest rate trajectory.

On Thursday, the US Producer Price Index (PPI) and Retail Sales will be closely scrutinized. The market believes there is a 79% chance the Fed will maintain rates at its October 27-28 meeting, up from 51% a month prior, but the odds of an increase at the December meeting stand at 89.4%, according to the CME FedWatch tool.

The table below illustrates the percentage change in the US Dollar (USD) against selected major currencies today. The US Dollar experienced the steepest decline against the Australian Dollar. A heat map displays percentage changes of major currencies against one another, with the base currency on the left column and the quote currency on the top row. For instance, selecting the US Dollar from the left column and moving horizontally to Japanese Yen reveals the percentage change represented by USD (base)/JPY (quote).

Traders accounted for the possibility of extra Russian diesel deliveries and the situation in the Middle East. Yemen's Houthi rebels conducted missile strikes on various cities in Saudi Arabia, with the military stating that interceptors thwarted most projectiles. Saudi Arabia's Ministry of Energy reported a minor fire at the Saudi Aramco facility in Dhahran resulting from an attack, but no injuries were recorded.

Data from China's National Bureau of Statistics on Wednesday revealed that China's CPI increased 0.9% year-over-year (YoY) in September, slightly lower than the anticipated 1.0% rise from August. This figure was weaker than market expectations. In contrast, China's PPI rose 5.0% YoY in September, exceeding forecasts by 0.7%. In other news, US President Donald Trump announced that Taiwan had pledged to buy 30% of the gas from a proposed pipeline project in Alaska according to Reuters, though specifics of the agreement remain undisclosed.

Danske Bank analysts emphasized that the most significant data release of the week will be the US September CPI, which is due to be published on Wednesday afternoon. They projected "headline inflation at 0.5% month-over-month (m/m) and 3.6% year-over-year (y/y)," and "core inflation at 0.2% m/m and 2.5% y/y," with energy prices driving the anticipated uptick in headline inflation.

For the Fed, Danske Bank is focused on whether underlying inflation pressures are expanding. Given that this is the last inflation report before the October FOMC meeting and recent Fed statements suggest little urgency for another hike, Danske Bank believes "a clear upside surprise would be required for the Fed to signal a rate hike already in October."

On the policy outlook, Danske Bank notes Fed voter Waller's comment that AI-related demand is already influencing inflation, while non-voter Goolsbee concurred, warning that AI-driven investment could lead to persistent inflation. Chicago Fed's Goolsbee echoed similar sentiments, highlighting that AI-related investment appears to be overheating and may contribute to broader inflation.

Danske Bank concludes that these comments suggest the Fed will maintain a cautious stance in the near term, reinforcing hawkish signals. EUR/USD showed resilience above 1.1200 in the European morning as traders awaited ECB policymakers' speeches, including ECB President Christine Lagarde, Frank Elderson, and José Luis Escrivá. GBP/USD also gained strength, nearing 1.3270.

USD/JPY exhibited minor losses around 158.30, with traders pricing in nearly a 10% likelihood of a Bank of Japan (BoJ) rate hike this month and an 88% chance of a hike by December, based on Bloomberg's overnight swap data. Gold prices fell to near $4,150 on Wednesday. Analysts emphasize that upcoming US inflation data will be closely monitored, as it could offer hints about the Fed's latest monetary policy stance.

Inflation is measured by the price change of a representative basket of goods and services, with headline inflation expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation, which excludes more volatile elements like food and fuel that can fluctuate due to geopolitical and seasonal factors, is the metric that central banks target to maintain inflation at a manageable level, usually around 2%.

When core inflation exceeds 2%, higher interest rates are typically warranted, while a decline below 2% may justify lower rates. Higher interest rates generally strengthen a currency, while lower inflation does the opposite.