U.S. Inflation Data: Will It Favor a 25 or 50 Basis Point Rate Cut?

Today, the markets eagerly anticipate the release of U.S. inflation data, scheduled for 3:30 pm Amman time and 4:30 pm Dubai time. This data is among the most significant to be published this year, as it will have a direct impact on the Federal Reserve’s decision on interest rates during the September meeting. Following a downturn in the labor market and a rise in the unemployment rate to 4.3%, investors have begun to expect that the Fed might reduce interest rates by 50 basis points, rather than the previously expected 25 basis points. Today's inflation data will provide investors with a clearer understanding of the likely scale of the interest rate cut, as expectations are split between a 50-point and a 25-point reduction.

Yesterday, U.S. producer prices, a key indicator of inflation and often a predictor of future consumer price trends, increased by just 0.1% last month on a monthly basis, following a 0.2% rise in June. This data has fueled investor optimism about the likelihood of the Federal Reserve reducing interest rates. 

The Fed's preferred inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index, showed that inflation in June remained unchanged from the previous month and marked the slowest annual increase in core PCE in over three years. These data have divided investors with the probability of a 50 basis point or 25 basis point rate reduction now Today's inflation data is expected to clarify the situation. 

Expectations suggest that annual inflation will remain stable at the previous level of 3.0%. If inflation rates rise above 3%, the Fed may be inclined to maintain its pace of monetary tightening and cut interest rates by 25 basis points at the next meeting. However, if inflation drops below 3%, the likelihood of a 50 basis point rate cut may increase, potentially weakening the U.S. dollar while positively impacting gold and stocks as per analysts' expectations. 

Technically, the attached chart shows that the dollar index is stable within a triangle pattern, ranging between levels close to 102.2 and 106.0. If inflation rates slow down today, it could negatively impact the U.S. dollar, potentially the dollar may break the key support level near 102.2, and the next support level will be around 100.2. However, if the inflation data exceeds expectations, the dollar may receive a positive boost, continuing its rebound from current levels, with analysts expecting it to target levels near 104.8. 

Figure 1: U.S Dollar Index, 1W Time Frame, TradingView

We anticipate that the release of this data could be accompanied by fluctuations in the financial markets. It's important to remember that the initial market reaction, regardless of the actual reading, may be sharp and volatile at first before the market begins to stabilize.