US CPI preview: what does it mean for Fed rate cuts?​

What to expect from the US CPI report

​Economists forecast core inflation, which excludes food and energy prices, to remain steady at 3.3% year-over-year (YoY) for November. ​The monthly core consumer price index (CPI) reading is expected to show a 0.3% increase, a level consistent with the Federal Reserve's (Fed) disinflationary narrative.

Headline inflation is predicted to moderate further, supported by easing energy prices and broader price pressures.

Market participants, particularly those using forex trading platforms, are closely monitoring this release for its potential impact on US dollar movements.

Key components under scrutiny

• Shelter costs: housing-related expenses remain a critical focus, as they have been a significant driver of core inflation throughout 2023
• Services inflation: persistent inflation in services continues to concern policymakers, with wage pressures likely to keep prices elevated
• Energy prices: while excluded from core CPI, energy costs will influence headline inflation and consumer sentiment.

Market implications of the CPI dat

• An inflation print in line with or below expectations could reinforce market expectations for a December rate cut, potentially weakening the US dollar
• Increased activity is expected on trading platforms as investors react to the data across multiple asset classes
• Bond markets will be particularly sensitive to any surprises in the core inflation reading, affecting yields across the curve
• Equity markets may rally if the data supports a narrative of controlled inflation and potential monetary easing.

Impact on Federal Reserve policy

Markets currently price an 85% probability of a quarter-point rate cut in December, underlining the significance of this inflation report

• Traders should consider how the data might influence the Fed’s forward guidance
• A higher-than-expected reading could challenge the market’s dovish outlook and delay rate cuts into 2024
• The Fed’s response to this data will be pivotal for trading signals and market direction.

Looking ahead to 2025

• Markets are anticipating up to three additional rate cuts in 2025, contingent on inflation maintaining a downward trend
• Economic indicators between CPI releases will play a crucial role in shaping policy expectations
• The Fed’s actions in response to evolving inflation data will guide market sentiment throughout the year
• Traders should remain flexible in their strategies as the inflation narrative continues to unfold.