FX Daily: CPI can seal the deal on a Fed hike
Lead — The desk positions that today's CPI release is pivotal in solidifying expectations for a Federal Reserve rate hike. Per the full note from ING, current market pricing reflects only an 18 basis point increase for next week's FOMC meeting, suggesting that only a slight upside surprise is necessary to shift sentiment significantly. Given the USD's positive correlation with U.S. Treasury yield movements, this comes amid a backdrop where oil prices surged, enhancing inflationary pressures. However, hawkish positioning from the ECB poses a risk for a more pronounced downside in EUR/USD, as highlighted in recent currency assessments.
What the desk is arguing
The desk argues that today's CPI reading could decisively influence the Fed's rate hike trajectory, potentially allowing the market to fully price in a September increase. Per the full note, a modest surprise in CPI metrics could elevate expectations dramatically, given that current pricing suggests only an 18 basis point bump is anticipated.
The inflation consensus is set at 0.2% for core CPI and 0.4% for headline CPI, which aligns with ING's expectations. Additionally, factors such as the more aggressive stance from the ECB and rising oil prices add complexity to the Fed's decision-making framework, suggesting an intricate environment moving forward.
Where it sits in our coverage
Our internal consensus target for EUR/USD is 1.1678, with a median of 1.1700 across various firms. Key contributors include rbc with a December 2026 target of 1.1700 and morganstanley at 1.2000 for the same timeframe.
This desk's view is at the lower end of the spread relative to morganstanley's more aggressive targets, indicating a cautious stance on the euro's near-term potential against a strengthening USD. The divergence reflects broader market uncertainties, especially with hawkish sentiments emerging from the ECB.
How other firms see it
Aligned firms reflect a generally bearish outlook on EUR/USD in the near term, with goldman and scotiabank estimating the pair's December year-end target around 1.35 and 1.34, indicating some room for further downside. Conversely, firms like morganstanley maintain higher targets, emphasizing a potential EUR resilience in the medium term.
As dovish guidance from the ECB juxtaposes with potential Fed tightening, the interplay of these central bank policies will shape the EUR/USD trajectory. Keep an eye on how the GBP/USD movements interact with these dynamics, especially in light of upcoming BoE comments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Today's CPI data is crucial in shaping Fed rate hike expectations.
- 02Current market pricing suggests a modest basis point increase anticipated.
- 03The USD shows a tentative positive correlation to U.S. bond yields.
- 04A hawkish ECB stance could limit further downside in EUR/USD.
Market implications
Watch for a potential breach of key resistance at 1.17 in EUR/USD, which analysts are watching closely. The CPI print later today will be a key driver of sentiment ahead of the Fed meeting, making it essential to monitor those expectations closely.
Risks to this view
A significant miss in CPI could undermine the Fed's credibility and expectations for a September hike, leading to a USD pullback. Likewise, stronger-than-expected hawkish signals from the ECB may destabilize the anticipated USD strength.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
Société Générale | Bearish | 1.1400 |
Scotiabank | Bullish | 1.1700 |
Articles FX Daily: CPI can seal the deal on a Fed hike Published 07:54 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The bond market remains in turmoil, but this time the USD is reacting positively. This tentative rebuilding of a USD-back-end yield positive correlation bodes well for the greenback’s short-term outlook. We don’t think the bar is high for today’s CPI to endorse a Fed hike next week.
Still, a hawkish ECB means EUR/USD downside risks may be less pronounced Francesco Pesole , Frantisek Taborsky and Chris Turner Markets are pricing in 18bp for next week's FOMC meeting USD: Not a high bar to cement hike bets Oil prices and global bond yields both surged yesterday. In G10 FX, the reaction looked more like a rates story than an oil story, propagating through the global risk sentiment channel. The high-beta Australian dollar, New Zealand dollar and Norwegian krone led losses on a strong day for the US dollar, while the more defensive sterling and Swiss franc proved relatively resilient.
The dollar is tentatively re-establishing a positive correlation with long-end yields, helped by a smaller-than-expected $6bn Treasury buyback announcement, which ultimately translated into an even smaller $5.19bn operation yesterday. US Treasury Secretary Scott Bessent's reluctance to pick a fight with the bond market through oversized intervention remains a necessary condition for that positive USD-back-end rates correlation to regain its footing. Pricing for next week's FOMC inched up to 18bp yesterday, buoyed by the oil rally and a modest upward revision to July PPI, while August figures came in exactly on consensus.
Today's August CPI release can provide the green light to fully price a September hike with even a marginal upside surprise. Consensus stands at 0.2% month-on-month for core and 0.4% for headline. That is also ING's macro team's expectation, and our assessment is that the acceleration in headline inflation would be enough to tilt the balance towards a hike despite still-benign core dynamics.
The picture becomes more nuanced in the event of a downside surprise. Federal Reserve Chair Kevin Warsh set a high bar for incoming data to overturn the hawkish narrative, but Christopher Waller later suggested no hike would be needed if inflation continued to improve through August. Oil may prove the deciding factor, having rallied around 15% since then.
A softer CPI print could weigh on the dollar, but may not be enough to push September hike pricing below 50%, a level we suspect would be sufficient to bring any unconvinced FOMC members on board. We continue to see upside potential for the dollar. The yen rally has stalled and is no longer exerting a negative spillover effect on USD.
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