US inflation the main event in the day ahead

So, what’d I miss?

The dollar is keeping in good stead over the last week as traders have conceded to pricing in a 25 bps rate cut by the Fed for November now. A soft landing scenario looks more and more certain each day.

The odds of a 25 bps rate cut for next month are now at ~85% and traders have completely phased out pricing of a 50 bps move. That comes after the hotter jobs report on Friday last week of course.

So, what’s next?

On the agenda today, there is the US CPI report to get through. The current backdrop is that inflation hasn’t been too much of a focus over the last two to three months. The disinflation process is continuing to take hold but there are just a couple of bumps in the road.

The major focus has switched towards the labour market and how the US economy is holding up. And so far, it isn’t as bad as feared at the end of July or in early August. The dollar is benefiting from that but keep in mind, there’s also the long con at work for the greenback.

Going back to inflation, the numbers today shouldn’t offer too much. That is if they match up with the estimates. Core annual inflation is expected to remain at 3.2% while headline annual inflation is expected to fall to 2.3% – down from 2.5% previously.

So long as inflation is not heating back up, it vindicates the Fed to keep cutting rates at consecutive meetings. The only question will be the pace of the rate cuts instead.

Hence, barring any upside surprises, the report today should justify market pricing for a 25 bps move in November.

And that is pretty much the state of the game as we get into the second half of the week.

That should keep the dollar on steadier footing with equities staying poised as well. The latter continues to spin the narrative no matter what and that seems to be something you can count on since the end of last year.

All that being said, do keep a watchful eye on the bond market. 10-year Treasury yields might be catching a solid bounce as of late but is running up against its 100-day moving average near 4.065% currently:

This article was written by Justin Low at www.forexlive.com.