US CPI to test Fed’s path to future rate cuts

Analysts predict the headline inflation lifted last month, but core price growth was stable, opening the door for a September Fed cut.

Core inflation seen flatlining at elevated levels

US inflation data for August is set to show that core price pressures remain sticky but stable, keeping the Federal Reserve on course to cut interest rates later this month. Consensus forecasts suggest that core CPI will rise by 3.1% year-on-year, broadly unchanged from recent months. On a monthly basis, prices are expected to climb around 0.3%.

The figures indicate that while inflation remains above the Fed’s 2% target, it is not accelerating at a pace that would prevent policymakers from easing policy. Importantly, CPI is not the Fed’s preferred measure of inflation, but the release comes less than two weeks before the September FOMC decision and serves as an important hurdle for the central bank.

Inflation data could shape the path forward for US rates

If CPI data comes in line with expectations, it would reinforce market pricing for a 25-basis-point rate cut in September, and potentially leave room for additional easing later in the year. A result modestly higher than forecast could spark volatility by reviving concerns about tariff-related cost pressures feeding into consumer prices, raising the risk of inflation expectations drifting further from target.

(Source: CME Group)

Conversely, a weaker-than-expected print—particularly if monthly price growth falls short—could fuel speculation about a larger 50-basis-point cut. That scenario would likely support equities, weaken the US Dollar, and lift gold prices as markets lean into the prospect of deeper policy easing.

The Fed faces an inflation and employment balancing act

The upcoming CPI release underscores the Fed’s balancing act between elevated but contained inflation and signs of a weakening labour market. While officials focus more closely on the PCE price index, Wednesday’s data will help determine the scope and speed of cuts at a critical juncture for the economy.

With futures markets already discounting a September move, the August CPI read will be instrumental in shaping expectations for how far and fast the Fed can reduce rates in the months ahead. An upside or downside could have an impact on the shape of the curve and therefore market sentiment and asset valuations.

EUR/USD in focus ahead of US inflation data and ECB decision

US inflation data collides with an ECB decision, putting the EUR/USD in focus. The pair has consolidated recently as short positioning in the US Dollar unwinds and political risks in France reduce the appeal of European sovereign assets.

The trend for the EUR/USD remains constructive, however, with the pair in a primary uptrend. Price action signals a possible break-out, with a break of resistance around 1.18 a signal of a bullish uptrend. A sustained drop below 1.16 would put the uptrend in question.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)