Investors boost odds of half-point Fed hike as core CPI rise meets Waller's bar
The recent uptick in core CPI has led market participants to significantly raise their expectations for a half-point interest rate hike by the Federal Reserve, aligning with Waller's previously stated threshold. This shift in sentiment not only reflects growing inflationary pressures but also hints at a tightening monetary policy environment, with implications for USD strength. As a result, both the move in terminal rate forecasts and increased USD carry make this a critical moment for forex traders to reassess positioning ahead of the next Fed decision.
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). The recent Fed expectations align closely with the more bullish views expressed by firms like JPMorgan, suggesting a potential upside for USD.
How firms align
JPMorgan's target of 1.10 suggests a bullish alignment with the current forecast for USD following the CPI data. In contrast, BofA's more conservative target of 1.04 reflects skepticism about sustained USD strength, indicating a divergence in outlook among analysts. See our internal reports for further details on these positions.
What the data shows
Recent forecasts underline a heightened sensitivity to inflation data, with revisions indicating a potential acceleration in Fed tightening. For more insights on market positioning and inflation expectations, see our related research at /research/inflation-fx-impact.
How firms align with this view
Aligned with the headline view
Contrary positioning
Key takeaways
- 01Market pricing now favors a 50bp Fed hike if core CPI meets expectations.
- 02USD carry trades are becoming increasingly attractive amid rising terminal rate forecasts.
- 03Expect volatility ahead of key CPI data next week, with levels closely watched around 1.075 for EUR/USD.
- 04A print above Waller's threshold could further accelerate USD appreciation.
Market implications
Traders should monitor the upcoming CPI release closely, as a strong print could push USD higher. The consensus target of 1.075 for EUR/USD will be pivotal, with resistance levels expected to shift if expectations evolve.
Risks to this view
A significant downturn in core inflation could swiftly reverse current bullish USD sentiment, potentially invalidating the heightened rate hike expectations. Additionally, geopolitical factors or unexpected Fed statements could also derail the current narrative.
Sentiment by currency
USD+EUR JPY GBPComposite USD score: +0.72
Sources & References
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