US CPI inflation: Upside surprise could further underpin the USD

The October US CPI inflation (Consumer Price Index) data will be released today at 1:30 pm GMT.

• Headline CPI inflation is expected to report an increase of 2.6% (YY) from September’s reading of 2.4% (max/min estimate range: 2.7-2.3%). Between September and October, inflation is anticipated to have increased by 0.2%, unchanged from the previous data (max/min estimate range: 0.3-0.1%).

• Core CPI inflation is forecast to report an increase of 3.3% (YY), unchanged from September (max/min estimate range: 3.4-3.2%). Core inflation is expected to have risen by 0.3% between September and October, unchanged from the previous values (max/min estimate range: 0.4-0.2%).

The focus of the US Federal Reserve has increasingly shifted towards the jobs market; however, inflation continues to be a critical macroeconomic indicator that traders and investors will monitor closely today. This is particularly relevant in light of Donald Trump’s election victory, which carries potential inflationary implications. Consequently, I have noted some views leading up to this event.

As I am sure we’ve all seen, Trump's victory has bolstered the US dollar (USD), US Treasury yields and the US equity market. Importantly, Trump’s proposed policies – tariffs, lower taxes, deregulation and fiscal stimulus - increase upside risks to inflation and may bolster growth.

The aforementioned factors contribute to the observed ‘hawkish repricing’ in the rates markets. According to Refinitiv data, markets are now pricing in 16 basis points (bps) of easing for December’s meeting (65% chance of another 25 bp cut). Nevertheless, before this policy meeting, we will need to consider this week’s inflation print, another release on 11 December, the US employment situation report on 6 December, and the PCE data at the end of this month.

What I am watching

Hawkish reaction – Favoured view

For a hawkish reaction – upside in USD and US Treasury yields and a possible dip in US equities – I want to see headline YY (core YY) come in at (or above) the market’s maximum estimate of 2.7% and 3.4%, respectively.

Given the current bullish view surrounding the USD and Trump’s planned policies, an upside surprise in inflation data would essentially allow traders to buy dips or pyramid current long positions. However, while this could prove bearish for US equities, any downside move (given the current momentum behind US stocks right now) is likely to be short-lived and ultimately bought into.

Dovish reaction

For a dovish reaction – downside in the USD and US Treasury yields and a bid in US equities – I would be looking for a print below the minimum estimate of 2.3% for YY headline inflation, defying economists' estimates of a higher print and recording a seventh consecutive deceleration in the data at levels not seen since early 2021. Therefore, this will likely be enough to cause surprise and thus an unwind in USD positions, at least in the short term.

In addition to the above, however, having core inflation at sub 3.2% may intensify any USD downside; similarly, this is below the economist’s minimum estimates and at levels not seen since early 2021.