US CPI inflation holds steady at 3.7% in September vs. 3.6% forecast

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), held steady at 3.7% on a yearly basis in September, the US Bureau of Labor Statistics (BLS) reported on Thursday. This reading matched the August print and came in slightly above the market expectation of 3.6%.  

The annual Core CPI, which excludes volatile food and energy prices, rose 4.1% in September to meet analysts' estimates. On a monthly basis, the CPI and the Core CPI increased 0.4% and 0.3%, respectively.

Follow our live coverage of the September inflation report and the market reaction.

"The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase," the BLS noted in its press release. "An increase in the gasoline index was also a major contributor to the all items monthly rise."

Market reaction to US CPI data

The US Dollar gathered strength against its major rivals with the immediate reaction. As of writing, the US Dollar Index was up 0.3% on the day at 106.05.

Assessing the market reaction, "without a surprise in core prices, markets reacted to the small surprise in the headline, raising rate hike expectations via higher yields. The US Dollar advanced while stocks and Gold retreated," noted FXStreet analyst Yohay Elam and added:

"However, Fed officials recently indicated that higher returns on Treasuries obviate the need for further hikes. They may repeat this stance in speeches following the release, reversing current moves."

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This section below was published as a preview of the US September Consumer Price Index data at 06:00 GMT.

• The Consumer Price Index in the US is forecast to rise 3.6% YoY in September, down slightly from the 3.7% increase recorded in August.
• Annual Core CPI inflation is expected to edge lower to 4.1% in September.
• US CPI inflation report could significantly impact the US Dollar’s valuation by altering the market pricing of the Fed’s rate outlook.

The highly-anticipated US Consumer Price Index (CPI) inflation data for September will be published by the Bureau of Labor Statistics (BLS) at 12:30 GMT. 

The US Dollar (USD) gathered strength against its rivals in September and early October, boosted by upbeat macroeconomic data releases and surging US Treasury bond yields.

Although the Federal Reserve’s (Fed) latest Summary of Economic Projections confirmed on September 20 that policymakers saw it appropriate to raise the policy rate by another 25 basis points before the end of the year, the CME Group FedWatch Tool shows that markets are still pricing in a nearly 70% probability that the policy rate will remain unchanged at the range of 5.25%-5.5% in 2023. Nevertheless, the US Treasury bond sell-off that was triggered on growing fears over a US government shutdown in the last week of September fuelled another leg higher in US yields. 

US CPI inflation data could influence the market positioning regarding the Fed’s rate outlook, especially after the September jobs report unveiled an impressive increase of 336,000 in Nonfarm Payrolls. Commenting on the policy outlook over the weekend, Fed Governor Michelle Bowman said that the US central bank will likely need to tighten the monetary policy further and hold the interest rate at a restrictive level for some time to return inflation to the 2% target.

What to expect in the next CPI data report?

The US Consumer Price Index, on a yearly basis, is expected to rise 3.6% in September, at a slightly softer pace than the 3.7% increase recorded in August. The Core CPI figure, which excludes volatile food and energy prices, is forecast to rise 4.1% in the same period, down from the 4.3% growth in August.

The monthly CPI and the Core CPI are both seen rising 0.3%. Oil prices continued to push higher in September, with the barrel of West Texas Intermediate gaining 9% on a monthly basis. Even though there was a sharp decline in crude Oil prices in the first week of October, the reignited conflict between Israel and Hamas could cause energy costs to remain elevated in the near term. Nevertheless, it’s too early to say how geopolitical developments will impact the inflation outlook and the Fed’s monetary policy.

Previewing the US September inflation report, “the outsized payroll number raises the prospect the Fed may hike again, but it’s not a clincher. September Consumer Price Index data out this week should be more revealing,” said Analysts at Australia and New Zealand Banking Group (ANZ) and added: “We expect core inflation to rise by 0.2% m/m, which should be well received by the Fed.”

The Prices Paid Index of the ISM Manufacturing PMI survey – the inflation component – declined sharply to 43.8 in September from 48.4 in October, highlighting that input prices in the sector are falling at a faster pace. In the meantime, the Prices Paid Index in the ISM Services PMI held steady at 58.9 to show a lack of progress in taming services sector inflation.

When will the Consumer Price Index report be released and how could it affect EUR/USD?

The Consumer Price Index inflation data for September will be published at 12:30 GMT. The US Dollar Index, which gauges the USD’s valuation against a basket of six major currencies, benefited from safe-haven demand at the start of the week before coming under strong bearish pressure. The downward correction seen in US T-bond yields and the improving risk mood made it difficult for the USD to find demand.

The market positioning suggests that the USD has room on the upside in case the inflation data comes in stronger than anticipated. Investors are likely to pay close attention to the monthly Core CPI reading, which can’t be distorted by base effects. A monthly core inflation reading of 0.5% or higher could revive expectations for one more Fed rate increase and fuel another USD rally. Given the European Central Bank’s (ECB) willingness to hold rates steady, EUR/USD is likely to turn south in this scenario. 

On the other hand, a monthly Core CPI at or below the market consensus of 0.3% could make it difficult for the USD to stay resilient against its peers. While speaking at the Economic Club of New York last week, San Francisco Federal Reserve President Mary Daly argued that there was no need for additional policy tightening following the recent rise in US T-bond yields. "The need for us to take further action is diminished because financial markets are already moving into that direction and they've done the work," Daly explained. Hence, investors could refrain from betting on one more Fed rate hike and help EUR/USD gain traction.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: 

“The Relative Strength Index (RSI) indicator on the daily chart recovered to 50 this week and EUR/USD made a daily close above the 20-day Simple Moving Average (SMA) for the first time in over a month, pointing to a buildup of bullish momentum.”

Eren also outlines key technical levels to watch for:

“The 1.0650 level (Fibonacci 23.6% retracement of the July-October downtrend) aligns as a key pivot for EUR/USD. If this level is confirmed as support, buyers could remain interested in the Euro. In this scenario, 1.0750 (Fibonacci 38.2% retracement, 50-day SMA) could be set as the next target before 1.0830, where the 100-day and 200-day SMAs align.”

“Alternatively, sellers could take action if EUR/USD fails to stabilize above 1.0650 and cause the pair to decline toward 1.0550 (static level), 1.0500 (psychological level) and 1.0450 (end-point of the downtrend).”