Fed's preferred gauge showed core inflation at 3.0% in August, much lighter than expected
The latest data reveals that core inflation, as measured by the Fed's preferred gauge, has registered a surprising 3.0% in August, falling significantly below expectations of 3.3%. This deviation from projections signals a potential easing in inflationary pressures, which could reshape market expectations regarding future monetary policy. As the Fed continues to monitor these indicators closely, the implications for the USD are critical, potentially diminishing aggressive rate hike expectations.
Where it sits in our coverage
Our consensus EUR/USD target sits at 1.075 (median across 8 firms), with Goldman at the upper bound (1.12) and BofA at the lower (1.04). This aligns with the sentiment of the markets responding to core inflation data, suggesting potential shifts in investor positioning.
How firms align
Firms such as JPMorgan hold a bullish stance with a target of 1.10, reflecting an expectation for a weaker USD environment post-data release. Meanwhile, BofA's more cautious approach at 1.04 clashes with the general market sentiment, indicating some firms are not fully aligned with the easing inflation narrative.
What the data shows
The marked reduction in core inflation has led several firms to revisit their forecasts, suggesting a potential softening in the Fed's tightening cycle. For further insights, refer to our research insights at /research/core-inflation-impact.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01Core inflation at 3.0% in August signals easing pressure.
- 02USD outlook may soften as market recalibrates rate expectations.
- 03Watch for Fed signals on rate hikes—next meeting crucial.
- 04BofA shows resistance against the broader market view.
Market implications
Traders should be vigilant as we approach the next FOMC meeting, particularly if core inflation influences upcoming Fed statements. The key level of 1.075 in EUR/USD could be tested if the softened inflation narrative gains traction.
Risks to this view
A reversal could occur if subsequent data contradicts the easing inflation narrative, particularly if next month's report shows a rebound in inflation metrics or if Fed commentary signals continued hawkishness.
Sentiment by currency
USD+EUR JPY GBPComposite USD score: +0.75
Sources & References
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