US CPI set to decelerate further in July, adding to evidence of subsiding inflation

• The US Consumer Price Index is forecast to rise 2.9% YoY in July, at a softer pace than June’s 3% increase.
• Annual core CPI inflation is expected to soften to 3.2%.
• The inflation data could influence the probability of a 50 bps Fed rate cut in September.

The Bureau of Labor Statistics (BLS) will publish the highly anticipated Consumer Price Index (CPI) inflation data from the United States (US) for July on Wednesday at 12:30 GMT.

The US Dollar (USD) braces for intense volatility, as any surprises from the US inflation report could significantly impact the market’s pricing of the Federal Reserve (Fed) interest rate cut expectations in September.

What to expect in the next CPI data report?

Inflation in the US, as measured by the CPI, is expected to increase at an annual rate of 2.9% in July, down slightly from the 3% rise reported in June. The core CPI inflation, which excludes volatile food and energy prices, is seen ticking down to 3.2% from 3.3% in the same period.

Meanwhile, the US CPI is set to rise 0.2% MoM in July after declining by 0.1% in June. Finally, the monthly core CPI inflation is forecast to print 0.2%.

The disappointing jobs report from the US, which showed that Nonfarm Payrolls rose 114,000 in July, revived expectations for the Federal Reserve to cut the policy rate multiple times this year starting in September. Following the July 30-31 policy meeting, Fed Chairman Jerome Powell refrained from confirming a rate cut in September but noted that there was a “real discussion” about lowering the policy rate at that meeting. Additionally, Powell acknowledged that they are attentive to risks on both sides of the dual mandate. 

According to the CME FedWatch Tool, markets are currently pricing in a nearly 50% probability of a 50 basis points (bps) rate cut in September. 

Previewing the July inflation data, “while gaining some momentum, we expect core CPI prices to remain largely under control in July after registering an unexpected contraction in June,” said TD Securities analysts in a weekly report and added:

“Headline inflation likely strengthened m/m as well as energy prices are expected to rebound post sharp declines in May/Jun. Our unrounded core CPI forecast at 0.14% m/m suggests larger risks toward a rounded 0.2% increase.”

How could the US Consumer Price Index report affect EUR/USD?

The market anticipation of a 50 bps Fed rate cut in September will be put to test when July inflation data is released. In case the monthly core CPI, which is not distorted by base effects and the prices of volatile items, rises 0.3% or more, investors could lean towards a 25 bps rate reduction at the next Fed meeting. The market positioning suggests that such a reading could trigger a rebound in the US Treasury bond yields and help the US Dollar (USD) gather strength against its rivals with the immediate reaction.

If the monthly core CPI rises less than expected, market participants could remain hopeful about a 50 bps cut in September. In this scenario, the USD is likely to come under renewed selling pressure.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture suggests that the bullish bias remains intact, with the Relative Strength Index (RSI) indicator on the daily chart holding comfortably above 50. Additionally, the pair staged a decisive rebound after testing the 20-day SMA last week, reflecting the sellers’ hesitancy to commit to an extended decline.”

“On the upside, 1.0950 (static level) aligns as interim resistance before 1.1000 (psychological level, static level). If EUR/USD manages to flip 1.1000 into support, it could target 1.1140 (December 28, 2023, high) next. Looking south, immediate support could be identified at 1.0880 (20-day SMA) ahead of 1.0830 (200-day SMA) and 1.0800 (100-day SMA).”