Hotter CPI Boosts Rate Hike Bets Ahead of Fed Decision

EUR/USD compresses near 1.1600 after testing support.

The US Dollar Index (DXY) jumped after the release of the US Consumer Price Index (CPI), but erased all gains and ended last week almost where it started. The DXY measures the dollar’s performance against a basket of six other peers and is heavily affected by the US interest rate.

The CPI numbers were mostly in line with analysts’ expectations, but the data showed that inflation is heating up. On a month-on-month basis, the headline CPI increased 0.4%, as expected, while the previous value was 0.1%. The Core version increased by 0.3%, which was slightly above the forecast of 0.2%. On a year-on-year basis, the Core version decreased to 2.4% from the previous 2.5%, and the headline figure remained unchanged at 3.4%.

After the inflation data was released, the odds of a 25-bps rate increase jumped to 87% from around 60% before the announcement, according to the CME FedWatch tool. The rate will be announced this week, and with no major data releases ahead of the decision that could significantly shift the odds, the Fed is widely expected to add 25 bps.

Economic Calendar Highlights

The US Retail Sales will be released on Wednesday at 12:30 pm GMT, and although this is an important economic indicator, it will not change the rate odds substantially. The forecast is for a big jump, from the previous -0.3% to 0.5% for the Core version and from -0.6% to 0.8% for the headline number.

The Federal Reserve will announce the interest rate later on Wednesday, at 6:00 pm GMT, and Fed Chair Warsh will hold a press conference at 6:30 pm GMT. He is not a fan of forward guidance, so he may not send clear indications about future cuts or hikes. However, the press conference is usually a market mover, and the dollar reacts strongly.

The Bank of England (BoE) will announce its interest rate decision on Thursday at 11:00 am GMT, with no change anticipated. There’s no press conference scheduled, so the event could pass relatively quietly.

Technical Outlook – EUR/USD

After the CPI release, it looked like the support at 1.1600 may be broken. However, soon after the initial reaction, the pair erased most of the losses and finished the week at 1.1597. The 200-day Moving Average (red line) acted as resistance a few days back, and now it looks like the price action is compressing in a very tight range.

This type of behavior usually precedes a strong move, and with the interest rate decision looming, it’s very likely that we will see such a move this week. The main levels to watch are 1.1600 and 1.1400 as support, while 1.1700 will act as resistance.