Traders raise odds of 50 bps Fed rate hike as CPI rise exceeds expectations

The EUR/USD exchange rate remains stable around 1.1100 during the Asian trading session on Wednesday, recovering from the significant declines seen the previous day following the release of strong US consumer inflation data. The US Bureau of Labor Statistics announced on Tuesday that the headline Consumer Price Index (CPI) increased by 0.4% in October, up from the 0.6% rise in September and higher than the forecasted 0.3%.

Additionally, the core CPI, which excludes energy and food prices, grew by 0.3%, matching the previous month's increase and beating the expected 0.2%. These figures reinforce the possibility of a potential interest rate increase by the Federal Reserve (Fed) in December, which continues to strengthen the US Dollar (USD) and poses a challenge for the EUR/USD pair.

Fed Governor Christopher Waller cautioned that a more significant-than-anticipated core CPI reading of 0.3% might lead him to consider a larger rate hike of 50 basis points at the December 8-9 policy meeting, warning that a mere 25 bps increase could jeopardize the Fed's credibility. Philadelphia Fed President Anna Paulson emphasized the necessity of continued restrictive policy to bring inflation back down to 2%, while Dallas Fed President Lorie Logan suggested that rate hikes may need to accelerate faster than previously anticipated.

Fed policymakers' hawkish remarks, conveyed through an FXS Speechtracker score of 8.1/10, above the historical average of 7.6/10, indicate a bias towards tighter policy, with a focus on further tightening if inflation conditions worsen. The FXS Fed Sentiment Index remained unchanged at 145.28, signaling a hawkish stance in line with market expectations for more restrictive policy.

Despite the hawkish communication from the Fed, hopes for a diplomatic resolution to the US-Iran conflict may limit aggressive bullish bets on the safe-haven US Dollar. US Secretary of State Marco Rubio stated during a G7 meeting that no major combat operations in Iran are needed, following President Donald Trump's recent comments that the US plans to maintain the status quo in the conflict.

This development could limit the downside for the EUR/USD pair ahead of the final German CPI release and speeches by the ECB's Cipollone and Lagarde. The EUR/USD pair is trading below the 200-period Exponential Moving Average (EMA) at 1.1248, suggesting a bearish near-term bias within a typical range observed over the past month.

On the upside, the primary resistance level is the 200-period EMA near 1.1248, and a sustained break above this level could alleviate the current downside pressure. Conversely, bearish traders must await a sustained break below the trading range support, below the 1.1100 mark, before positioning for further losses.