Event Guide: U.S. CPI Report (September 2023)

Another batch of inflation numbers from Uncle Sam will be released this week!

Can these still influence expectations for Fed tightening? And how may the Greenback respond to the data?

Let’s take a look to see what market participants are anticipating from the September CPI report in the United States and how it may influence market prices:

Event in Focus:

U.S. headline and core CPI readings for September 2023

When Will it Be Released:

October 12, 2023 (Thursday), 12:30 pm GMT

Use our Forex Market Hours tool to convert GMT to your local time zone.

Expectations:

U.S. headline consumer price index m/m: +0.4% forecast vs. +0.6% previous

U.S. headline consumer price index y/y: +3.7% forecast vs. +3.7% previous

U.S. core consumer price index m/m: +0.3% forecast vs. +0.3% previous

U.S. core consumer price index y/y: +4.1% forecast vs. +4.3% previous

Forecasts as of Oct. 9, 3:00 pm GMT

Relevant Data Since Last Event/Data Release:

🟢 Arguments for Strong Inflation Update / Likely Bullish USD

September ISM services PMI prices component was unchanged related to August at 58.9

September ISM Manufacturing PMI prices component increased from 48.5 to 51.2

September S&P Global manufacturing PMI: “Less encouraging was the news on the inflation outlook,
as producers’ costs rose at the fastest rate for five months, largely on the back of higher oil prices. These increased costs are already feeding through to higher prices to customers, which will inevitably result in some renewed upward pressure on inflation.”

September S&P Global services PMI: “input costs rose at a further marked pace, with the rate of inflation similar to that seen in August. Panelists stated that higher energy, fuel, wage and food costs drove the latest increase in business expenses. The pace of cost inflation remained above the long-run series average. In line  with another substantial uptick in cost burdens, service providers hiked their selling prices in September. The pace of charge inflation accelerated to the fastest since July as firms sought to pass through greater costs to  customers.”

🔴 Arguments for Weak Inflation Update / Likely Bearish USD

Average hourly earnings  for September came inline with the August read of 0.2% (but below the 0.3% forecast)

Previous Releases and Risk Environment Influence on the U.S. Dollar

September 14, 2023

Event results / Price Action:

The August 2023 headline read for the U.S. consumer price index came in slightly above forecast and above July at 0.6% m/m; the core CPI read came in at 0.3% m/m, above the 0.2% m/m previous read, which was also the forecast.

The U.S. dollar was already under pressure as risk-taking sentiment, and this generally inline read brought in more sellers, likely on the idea inflation rates continue to stabilize in the U.S., lowering the need for the Fed to stay hawkish on monetary policy (and likely raising rate cut speculation bets).

Risk environment and intermarket behaviors:

Broad risk sentiment leaned net positive for most of this trading week in September, likely due to stimulative efforts from China and positive U.S. economic updates supporting the “soft landing” theme. This prompted a broadly weak week for the U.S. dollar and gold, versus oil, crypto and equities spending the week mostly in the green.

August 10, 2023

Event results / Price Action:

The July CPI report came in mostly in line with market estimates of 0.2% gains for both headline and core figures, but the year-over-year figure fell short at 3.2% versus the projected 3.3% reading.

The Greenback was off to a shaky start for the week as traders tried to gauge how the actual inflation figures might turn out. Fortunately risk-off flows came in play and kept the safe-haven dollar supported early on.

Hawkish Fed commentary and an upbeat PPI report helped the U.S. currency extend its rally until the end of the week.

Risk environment and intermarket behaviors:

Downbeat Chinese trade and inflation data printed at the start of the week helped buoy the safe-haven dollar higher against most of its rivals, even after jitters about a potential September government shutdown hit the airwaves.

The dollar also got an extra boost from reports of an increased Treasury supply, as the auction of 30-year bonds was awarded at higher-than-expected yields and the amount allotted to primary dealers was the highest since February.

Price action probabilities:

Risk sentiment probabilities: The eruption of the Israel-Hamas conflict prompted a risk averse market reaction at this week’s open, but with several major markets on holiday to start the week, volatility and directional biases are currently contained.

And with a calendar relatively light on major economic data catalysts until Wednesday, short-term risk sentiment going forward may hinge on developments on the conflict in Israel.

Any escalation would likely bring in further risk aversion sentiment (pro safe havens like USD, bonds and gold), as well as potentially spike oil prices higher in this particular situation.

U.S. Dollar scenarios:

Potential Base Scenario:

The U.S. dollar is poised for an intriguing week around the upcoming U.S. CPI update. Based on the September business survey data, the consumer inflation data this week is expected to align with or slightly surpass the August readings, and normally, that would prompt us to lean net bullish on USD going into the event.

However, geopolitical conflict raises the uncertainty of this week’s price outlook, but if we see further escalation to the situation in Israel, that may draw in traders to run to Dollar safety this week.

Also, U.S. PPI data and FOMC meeting minutes will come a day ahead of the CPI update, which could also shift how traders perceive the Greenback ahead of the event. The changes in producer prices sometimes gets passed onto the consumers, so having this read before the CPI update may lead traders to price in CPI expectations, potentially raising the odds of a “buy-the-rumor, sell-the-news” scenario playing out after the CPI event.

The FOMC meeting minutes won’t likely present any new information to the markets, especially with several FOMC members giving speeches this week.  But it’s always an event to watch in case traders do get surprise rhetoric from the minutes, which will likely raise volatility across the financial markets.

So, there are a lot of variables to consider before the CPI event that may influence the Greenback, which is why the best practice in this scenario would be to wait for the data, see how it relates to forecasts / previous reads, and how the market reacts to the event.

Based on the last two CPI releases and how the U.S. dollar price action trended after the event, waiting for the data will likely still present opportunities to catch a short-term (1-2 day) trend.

And if geopolitical tensions are still high & consumer inflation data comes out higher, the odds rise of U.S. seeing gains at the end of the week, especially if USD continues to pullback ahead of CPI & CPI comes in much higher than expected. Look for long USD setups to match your risk management style, especially against “risk-on” assets like AUD, NZD, or even equities and crypto.

Potential Alternative Scenario:

There is a non-zero chance of consumer inflation rates coming in below expectations and/or forecast, which would be a big surprise to the markets. This would likely prompt traders to further price in lower odds of one more rate hike in 2023 (which currently sits at 25.4% for December according to the CME Fed Watch tool).

That may draw in further U.S. dollar selling, which kicked off last week as U.S. jobs data signaled higher odds of the Fed’s highly sought after “soft landing / falling inflation” scenario. But the geopolitical situation drawing in risk aversion behavior may still be at play, so as with the base scenario discussed above, the best practice may be to wait for the data, see how it relates to forecasts / previous reads, and how the market reacts to the event before determining your own directional bias and risk management plan.

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.