Can the CPI break Fed's 75bps streak

With forecasts for what the Fed will do at the next meeting, tomorrow's CPI figures might be the tiebreaker that could push the dollar and the stock market.
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The setup for the next FOMC

After the last FOMC meeting, Powell was adamant that rates would continue to rise. But, the big takeaway for the market was that the pace might be about to slow down. How much is the main debate, since economists are virtually evenly split regarding what to expect at the next meeting. 52% say it will be 25bps, while 48% say it will be 50bps. What happens with the CPI figures could be pivotal.

The next Fed meeting is on December 14, while the next release of CPI data is on December 13. The Fed will have the data to make the decision, but the market will have no way to gauge what the Fed might do in response. So, the data coming out tomorrow is likely to be the setup ahead of the next policy meeting so that the data could set the course of the dollar for the next month.

Core inflation could save the day

The headline inflation rate is expected to continue downward, dropping 8.0% from 8.2% in September. This descent has primarily been attributed to decreasing fuel costs, thanks to lower crude prices. The bump in oil prices following OPEC+ isn't expected to have filtered through to consumers yet.

Where things are different is with core inflation, which the Fed closely follows. That's expected to drop for the first time since July, down to 6.5% from 6.6% prior. It's likely too early for the Fed to do a victory lap, but slowing core inflation does provide some room not to be as aggressive with the tightening. But if core inflation were to move above 6.6%, it would be another multi-decade high and could not only shift the consensus towards 50bps but put 75bps back as an option.

Eurodollar repelled at channel low

EUR/USD appears to be in a bullish channel heading towards the upper trendline after a strong bounce at the lower end. The measured move from the preceding low (H) suggests prices could extend to $1.02 (R2), provided $1.01 (R1) breaks. Above the former, traders could focus on the top trendline near $1.025.

If $1.01 holds firm, parity (S1) will come back into focus, with the September 6 low at 0.9865 (S2) being solid support below $1.00. The weakening of the 0.9730 swing will expose the low of 0.9630 and the base at 0.9550.

Key takeaways

The CPI figures coming out tomorrow could be pivotal in determining the course of the dollar up until the next FOMC meeting on December 14. The headline inflation rate is expected to continue its downward trajectory, but core inflation is expected to drop for the first time since July. If core inflation moves above 6.6%, it could shift the consensus towards 50bps or even 75bps.