US core CPI inflation expected to hold steady in June

• The US Consumer Price Index is forecast to rise 3.1% YoY in June, at a softer pace than May’s 3.3% increase.
• Annual core CPI inflation is expected to hold steady at 3.4%.
• The inflation data could confirm or deny a Fed rate cut in September and drive the US Dollar valuation.

The Bureau of Labor Statistics (BLS) will publish the highly anticipated Consumer Price Index (CPI) inflation data from the United States (US) for June 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 3.1% in June, down from the 3.3% rise reported in May. The core CPI inflation, which excludes volatile food and energy prices, is seen holding steady at 3.4% in the same period.

Meanwhile, the US CPI is set to rise 0.1% MoM in June after staying unchanged in May. Finally, the monthly core CPI inflation is forecast to rise 0.2% to match the previous increase.

Federal Reserve (Fed) Chairman Jerome Powell delivered the Semi-Annual Monetary Policy Report and testified before US Congress earlier in the week. In his prepared remarks, Powell reiterated that it will not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably toward 2%. When asked about the latest developments in the jobs market, "the most recent labor market data sent a pretty clear signal that the labor market has cooled considerably," he noted. In the end, his remarks failed to move the needle with respect to market pricing of a Fed rate cut in September. According to the CME FedWatch Tool, the probability of the Fed leaving the policy rate unchanged in September stands at around 26%, virtually unchanged from where it stood before this event.

Previewing the June inflation data, “we expect the June CPI report to show that core prices remained largely under control after posting a surprisingly soft 0.16% gain in May,” said TD Securities analysts in a weekly report.

“Headline inflation likely printed flat m/m again (-0.01%) as energy prices continue to provide large relief. Note that our unrounded core CPI forecast at 0.18% m/m suggests larger risks for another dovish surprise to a rounded 0.1% increase,” analysts added.

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

Investors remain optimistic about a Fed rate cut in September, but the market positioning suggests they are not fully convinced yet. Hence, a smaller-than-forecast increase in the monthly core CPI, a reading of 0.1% or smaller, could confirm a policy pivot in September. In this scenario, the US Dollar could come under selling pressure with the immediate reaction.

On the other hand, an increase of 0.3% or bigger could highlight a lack of progress in disinflation and cause market participants to reassess the probability of an interest rate reduction in September. In this case, investors could price in a widening policy gap between the European Central Bank (ECB) and the Fed, opening the door for a sharp decline in EUR/USD in the near term.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD holds above the 100-day and the 200-day Simple Moving Averages (SMA) following the pullback seen earlier in the week, reflecting sellers’ hesitancy. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds above 50 ahead of the US inflation data, indicating a slightly bullish bias in the short term.”

“The Fibonacci 23.6% retracement level of the mid-April-June uptrend forms interim resistance at 1.0850. Once EUR/USD clears this level, it could face next resistance at 1.0900-1.0915 (psychological level, June 4 high) before targeting 1.1000. On the downside, technical sellers could take action and force EUR/USD to stretch lower if the pair drops below 1.0800 (100-day SMA, 200-day SMA) and starts using this level as resistance. In this scenario, 1.0750 (20-day SMA) could be seen as the next support before 1.0680 (Fibonacci 78.6% retracement).”