Market Drivers: Could CPI Data Shift Fed’s Potential Easing Path in September?

The US Dollar edged higher on Tuesday, rebounding from a weak start to the week, buoyed by cautious optimism surrounding US-China trade talks in London and anticipation for Wednesday’s critical US inflation data. Markets remain on edge, with the potential for these events to reshape expectations for Federal Reserve policy in September.

Dollar and Markets Brace for CPI

The US Dollar Index (DXY) hovered around 99.00, stabilized by steady Treasury yields and heightened focus on US-China trade negotiations. Wednesday’s US Consumer Price Index (CPI) release, expected to show headline inflation rising to 2.5% year-over-year from 2.3%, takes center stage. Core CPI is projected to tick up to 2.9% from 2.8%. A stronger-than-expected print could solidify expectations of sustained 4.25%-4.50% rates, boosting the Dollar, while a softer report might fuel bets for a 25-basis-point cut in September, per the CME FedWatch Tool’s 54.7% probability. Also due are MBA Mortgage Applications and the EIA’s crude oil inventory report, which could sway sentiment.

Euro and Pound Face Headwinds

EUR/USD oscillated around 1.1400, reflecting caution as US-China trade talks unfold. With no major eurozone data scheduled, attention shifts to speeches from ECB officials Buch, Lane, and Cipollone, which could hint at future policy moves. Meanwhile, GBP/USD slumped to multi-day lows near 1.3450 after a weak UK jobs report but later regained some ground. Chancellor Reeves’ Spending Review looms as the next focal point, potentially influencing Sterling’s path amid broader trade uncertainties.

Yen and Aussie Navigate Trade Dynamics

USD/JPY climbed to a two-week high near 145.30, driven by Yen weakness despite a subdued forex market. Japan’s upcoming Producer Prices data could provide clues on inflationary pressures, potentially supporting the Yen if Bank of Japan Governor Kazuo Ueda’s hawkish stance gains traction. AUD/USD held above 0.6500, lifted by trade talk optimism, with Australia’s Consumer Inflation Expectations due Wednesday shaping the next moves.

Commodities Reflect Mixed Sentiment

WTI crude oil briefly topped $66.00 per barrel, hitting a two-month peak on hopes of a US-China trade breakthrough, before retreating to $64.00 as optimism faded. Gold prices wavered around $3,330 per troy ounce, unable to sustain Monday’s gains amid trade-related caution. Silver, after touching $37.00 per ounce—its highest since February 2012—pulled back sharply, snapping a three-day rally.

What’s Next for Markets?

Wednesday’s CPI data will be pivotal. A hot report could drive USD/JPY toward 146.00 and lift bond yields, pressuring equities and gold. A dovish outcome might weaken the Dollar, boosting risk assets and AUD/USD. Trade talk progress or setbacks will amplify volatility, with geopolitical risks like Iran’s nuclear tensions adding complexity. Markets should prepare for sharp moves as data and diplomacy collide.