While the US CPI numbers came in hotter than expected, investors remain laser-focused on the deteriorating labor market. Only a few economists had forecast a 0.3% month-on-month core CPI jump for August, leaving markets a bit taken aback by the figure. However, the likelihood of a 25bps cut in September remains intact, with markets pricing in about 28bps, signaling preference for a modest reduction. The fact that the uptick in inflation didn’t spook markets suggests that investors are comfortable with the idea that the Fed is okay with inflation’s steady trajectory, even if it dimmed the prospects of a 50bps cut. The spotlight has shifted to the labor market, now the central focus for market participants.
Asian equities followed Wall Street’s lead, advancing on Thursday as global traders calmly anticipated next week’s Fed rate decision. The consensus for a 25bps cut is a relief for investors, who seem happy to see the end of the “jumbo cut” debate for now, knowing the Fed's playbook still leaves the door wide open for further easing. The "Fed put" is alive and well, ensuring that markets will get the larger cuts they crave sooner or later if needed.
Meanwhile, USD/JPY continues its rally, driven by a rebound in risk sentiment that’s pushing high-beta currencies vs the yen higher, bringing USD/JPY along for a more extended ride that rate differentials suggest.. The weaker yen fueled a solid bounce in Tokyo shares, with traders embracing the well-known relationship: a weaker yen boosts exports.
The mechanical bid under oil prices, thanks to concerns over potential hurricane-related production shutdown in the Gulf of Mexico, is also noteworthy. But as with most weather-driven oil rallies, this one probably won’t have long legs—expect a modest $2-$3 bounce before the momentum fades.
The big event in the FX world today is the ECB meeting. Traders are eagerly waiting to see if the bank leans hawkish or dovish, potentially endorsing an October rate cut. The outcome will dictate whether EUR/USD dives below 1.1000 or rallies towards 1.1100, with Euro bulls hoping for a more restrained ECB stance. The key question: has too much easing already been priced into the ECB curve, or is the market hitting the sweet spot?
In more detail, the US dollar has been trading on firmer ground during the Asian session, buoyed by the stronger-than-expected US CPI report for August. This has tempered market expectations for a 50bps cut when the Fed kicks off its easing cycle next week. While the CPI surprise is unlikely to halt the Fed’s cutting trajectory, it does make a faster pace of cuts less likely. The Fed will probably view the August CPI as a blip, considering the broader trend of slowing inflation, a loosening labor market, and falling commodity prices.
The lift in US yields and renewed risk appetite has pushed USD/JPY back towards 143.00 after hitting a fresh low of 140.70 yesterday. It’s been a bit of a rollercoaster, keeping everyone on the momentum train rather than placing firm directional bets—standard fare in our weekly FX playbook.
As for the euro, it has dipped against the US dollar ahead of the ECB policy meeting, bringing EUR/USD closer to the 1.1000 level. This move is driven more by a stronger dollar than euro weakness, although today’s widely expected rate cut offers little support for the single currency. While I don’t expect ECB President Christine Lagarde to wax overly dovish—she’s always cautious about protecting the euro—the euro remains one of the dirtier laundry items in FX’s basket. It will take a mix of better EU data surprises or continued US data misses to spark life in the euro bulls. That said, with the euro slightly oversold, there’s room for a EUR/USD bounce if the ECB walks back market expectations for an October rate cut.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.
Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
Recommended Content
Editors’ Picks
![EUR/USD keeps range above 1.1000 ahead of ECB policy announcements](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/money-59004818_XtraSmall.jpg)
EUR/USD keeps range above 1.1000 ahead of ECB policy announcements
EUR/USD is gyrating in a tight range above 1.1000 in European trading on Thursday. Traders assess the latest US CPI inflation data, bracing for the ECB policy announcements amid a positive risk sentiment and sustained US Dollar strength.
![GBP/USD holds the bounce near 1.3050, US data in focus](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/iStock-170160529_XtraSmall.jpg)
GBP/USD holds the bounce near 1.3050, US data in focus
GBP/USD is holding the recovery from three-week lows to trade near 1.3050 in the European session on Thursday. The pair is underpinned by persisting risk flows and a pause in the US CPI-led Dollar rebound. The focus now shifts to the US PPI inflation data.
![Gold keeps knocking at the door of all-time-highs](https://editorial.fxstreet.com/images/Markets/Currencies/Crosses/XAUUSD/gold-bar-and-dollar-bills-42586628_XtraSmall.jpg)
Gold keeps knocking at the door of all-time-highs
Gold continues trading in its established range just below its all-time high on Thursday, as traders await more US inflation data, this time in the form of “factory gate” price inflation, or the PPI for August. The data could further impact expectations regarding the trajectory of US interest rates, which in turn will likely impact both the price of Gold and the USD.
![European Central Bank widely expected to cut interest rates in September](https://editorial.fxstreet.com/images/Macroeconomics/CentralBanks/ECB/ecb-ezb-european-central-bank-frankfurt-68897939_XtraSmall.jpg)
European Central Bank widely expected to cut interest rates in September
The European Central Bank is expected to cut key rates by 25 bps at the September policy meeting. ECB President Christine Lagarde’s presser and updated economic forecasts will be closely scrutinized for fresh policy cues.
![Uniswap price is poised for a rally if it breaks above the ascending triangle pattern](https://editorial.fxstreet.com/images/Markets/Currencies/Cryptocurrencies/Uniswap/uniswap-150x150logo-637399982744667692_XtraSmall.png)
Uniswap price is poised for a rally if it breaks above the ascending triangle pattern
Uniswap price trades inside an ascending triangle pattern; a breakout signals a rally ahead. This bullish move is further supported by UNI’s on-chain data, which shows a negative Exchange Flow Balance and decreasing exchange supply, hinting at a rally ahead.
![Moneta Markets review 2024: All you need to know](https://editorial.fxstreet.com/images/IT/Testing/Review/FXSBadgeCertifiedBackg_XtraSmall.png)
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.