Hotter US inflation leaves the market gunning for rate hikes
At a Glance
The recent print of hotter-than-expected September core inflation has reinforced expectations for further Federal Reserve interest rate hikes. Per the full note from ING, the data revealed a core inflation increase of 0.3% month-over-month, slightly above the consensus forecast of 0.2%. This unexpected rise in inflation, driven primarily by higher shelter costs, energy prices, and a significant spike in gasoline prices, suggests that the Fed might have more tightening ahead, despite some signs of stagnation in wage growth and permeating weakness in the housing market. The desk believes that unless these persistent inflationary pressures abate, the market should be prepared for potential changes in the Fed's policy trajectory.
Key Takeaways
- 01September core inflation rose 0.3% MoM, exceeding expectations of 0.2%.
- 02A 9.1% increase in gasoline prices significantly contributed to this inflation spike.
- 03The market anticipates potential further tightening from the Federal Reserve.
- 04Weakness in wages and housing may provide a counterbalance to inflationary pressures.
Full Analysis
What the desk is arguing
The desk maintains that the recent higher-than-expected core inflation figures will likely lead to increased scrutiny of the Federal Reserve's rate-setting path. As reported by ING, the core inflation rose 0.3% month-on-month, contrasting with the anticipated increase of 0.2%, signaling stronger-than-expected price pressures that may compel policymakers to act.
The pressure is underscored by specific components in the index, particularly a notable 0.4% increase in shelter costs and a 9.1% jump in gasoline prices. Even if parts of the economy reflect stagnant inflation, the overall trend suggests that the Fed may not be done with tightening measures yet.
Where it sits in our coverage
Our FX coverage indicates a consensus target for USD/EUR at 1.075, with a range spanning from 1.04 to 1.12, as reported by various firms. Notably, jpmorgan stands firm with a target of 1.10 for March 2026, while bofa provides a conservative stance projecting 1.04 for the same tenor.
This view aligns with our expectations of sustained strength in the dollar following the inflation report, placing this outlook on the upper end of the range.
How other firms see it
There is a broad consensus among firms like jpmorgan and goldman that the rising inflation could prompt further Fed action, bolstering the USD against major pairs. Conversely, firms like bofa question the sustainability of such a trend and maintain a more cautious stance on dollar strength in the mid-term.
Traders should be particularly sensitive to the USD/EUR currency pair, as its trajectory reflects central bank sentiment and market expectations regarding policy adjustments, especially following this inflation data.
Market Implications
Traders should monitor movement in the USD/EUR pair closely, particularly as its reaction to upcoming Fed communications will be telling about future rate expectations. The current core inflation print positions the USD for possible strengthening or further volatility depending on subsequent economic data.
From the original
Articles Hotter US inflation leaves the market gunning for rate hikes Published 14:09 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download September core inflation was hotter than expected and this has reinforced the view that the Federal Res
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Sticky US inflation justifies a Fed rate hike
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