US CPI and the legendary September rate cut

The USD nosedived, and the chances of the Federal Reserve cutting interest rates in September received a major boost today as US CPI figures showed a further fall in inflation, down to 3% - ever closer to the Fed’s 2% target.

According to forecasts compiled by Bloomberg, the consumer price index's year-on-year rise of 3.1% was lower than economists’ expectations of 3.1% and followed a 3.3% increase in May. Treasury yields dropped, and stock futures rose after the figures were published, as traders increased their bets on two interest rate cuts this year.

According to the CME FedWatch, the odds of a September cut rose to over 80% per cent in the immediate aftermath of the CPI data, compared with 72% beforehand.

Federal Reserve Chairman Jay Powell delivered the Semi-Annual Monetary Policy Report and testified before US Congress earlier this week. In his prepared remarks, Powell reiterated that cutting the policy rate would not be appropriate until they gain greater confidence in inflation heading sustainably toward 2%. When asked about the latest developments in the jobs market, he said:  

"The most recent labour market data sent a pretty clear signal that the labour market has cooled considerably."

The probability of a September rate cut has fluctuated wildly all year, and the Fed’s base case has been for a single rate cut this year – most likely in November. However, with inflation rapidly dropping and the economy cooling, investors and analysts are confident that the Federal Reserve will cut rates from record highs.

After Thursday’s figures were published, the EUR/USD spiked, and the DXY fell. Yields on two-year US Treasuries, which track interest rate expectations and move inversely to prices, fell to a four-month low of 4.52%, while S&P 500 stock futures rose.

The data also showed that consumer prices fell by 0.1% on a monthly basis, compared with economists’ expectations of a 0.1% increase. It was the first time since 2020 that monthly consumer prices had fallen. Petrol prices fell 3.8% during the month, while a rise in housing-related costs slowed — contributing to the overall fall in inflation.

With the US economy now certain to be cooling significantly, we can expect the USD to remain weak over the near term, with gold and stocks sure to remain supported.

Technical Analysis

Following the better-than-expected CPI data from the US and the likelihood of a Fed rate cut in September, the EUR/USD soared. Having made substantial gains since the beginning of the month, today’s CPI news caused price to surge past the downtrend line (blue). Should price stabilise above the 1.0850 level, which corresponds with the 23.6% Fibonacci retracement level (of the recent uptrend) and the crossing of the downtrend line, 1.0900 is the next resistance level to focus on.

The MACD further confirms this upward momentum, with the MACD line (blue) having crossed above the signal line (orange) earlier in the month and a clear divergence of the two lines with a green histogram. Additionally, the price remains above all three moving averages (200-day, 100-day, and 50-day), with a golden cross likely to happen soon.

Strong support is present at the confluence of the 200-day EMA and 38.2% Fibonacci retracement level of 1.0795.