The US Bureau of Labor Statistics (BLS) will publish the September Consumer Price Index (CPI) data on Wednesday. The report is expected to show a further increase in headline prices and a small uptick in annual core inflation. Any divergence from analysts’ estimates couldinfluence the Federal Reserve’s (Fed) policy outlookand impact the US Dollar’s (USD) valuation.
The monthly CPI is forecast to rise 0.6%, following the 0.4% increase recorded in August, while the annual reading is seen edging higher to 3.6% from 3.4%. Core CPI figures, which exclude volatile food and energy prices, are expected to rise 0.2% and 2.5%, on a monthly and yearly basis, respectively.
Crude Oil prices rose sharply in the first half of September before correcting lower in the second half. Still, West Texas Intermediate (WTI) gained about 5% for the month. In this period, diesel prices per gallon in the US increased from $5.6 to $6.38, rising about 14%.
Chart: https://fred.stlouisfed.org/series/GASDESW
Analysts at Societe Generale highlightdiesel’s outsized role in shaping US inflation dynamics,noting that “few fuels are as deeply embedded in the US economy as diesel, with its importance spanning freight, agriculture, construction and industry.” This deep integration creates “a clear transmission channel from diesel prices into broader inflation,” and the bank stresses that “the empirical relationship is striking – diesel price changes explain roughly 70% of the variation in US inflation surprises.” Societe Generale calculates that “a 1% YoY increase in diesel prices is associated with a 0.06 percentage point rise in the inflation surprise,” underscoring how moves in this single fuel can materially influence headline inflation outcomes.
Some relatively cautious comments on further policy tightening from Fed policymakers and the disappointing September labor market caused investors to scale back bets for a 25 basis points (bps) interest rate hike in October. According to the CME FedWatch Tool, markets are currently pricing in about an 80% probability of a policy hold at the upcoming meeting.
Fed Vice Chair for Supervision Michelle Bowman said there is "no urgent need for more rate moves this year," while Minneapolis Fed President Neel Kashkari told Bloomberg that if they keep raisingrates, they will put different pressure on different parts of the economy. On a similarly cautious note, Fed Governor Christopher Waller said that they need to hike the policy rate further but added that they also need to be flexible about the pace. In the meantime, the Bureau of Labor Statistics reported that Nonfarm Payrolls rose by 29K in September, missing the market expectation of 90K by a wide margin, and the Unemployment Rate edged higher to 4.2% from 4.1% in August.
At this point, a significant upside surprise, at least a reading of 0.7% or higher, in the monthlyCPI print could revive October rate hike expectationsor confirm the federal funds rate will be higher than the current level in December, which currently has a probability of about 85%, as it would point to a spillover from high energy prices into the wider economy and consumer inflation. In this scenario, the USD could gather strength with the immediate reaction and causeEUR/USDto come under renewed selling pressure.
Conversely, a soft monthly inflation printof 0.4% or lower could reaffirm a policy hold in October. Even though such a reading is likely to weigh on the USD and help EUR/USD stabilize in the near term, it might not be enough to trigger a steady recovery, given markets’ waning confidence in the European Central Bank’s (ECB) ability to tighten monetary policy amidst the growing uncertainty surrounding France’s fiscal outlook and the widening spread between German and French government bonds, also called Obligations Assimilables du Trésor (OAT).
Finally, a monthly CPI print matching the market consensus, or coming in just 0.1 percentage points below it, could fail to materially alter the market pricing of theFedrate outlook and have limited impact on the USD’s performance.
Analysts at MUFG/BTMU argue that Marine Le Pen’s, the main opposition party leader in France, fiscal plans are unlikely to materially alter theoutlookfor French governmentbondsbefore voters go to the polls, stating that “this alternative budget is unlikely to make much difference to the risks associated with OATs ahead of the election next year – especially given a plausible scenario of a presidential election run-off in the second round between Le Pen and the hard-left candidate Jean-Luc Melechon, who is now usually polling second on around 20% versus Le Pen on around 30%.” Against this backdrop of persistent political uncertainty and sensitivity to global rates moves, MUFG/BTMU conclude that “EUR/USD downside risks are set to prevail.”
Valeria Bednarik, Chief Analyst atFXStreet, notes: “The EUR/USD pair remains depressed near its lowest level since May 2025 in the 1.1150 price zone, and aims to extend its decline from a technical point of view. The daily chart shows the pair trading below all bearish moving averages, with the 20-day Simple Moving Average (SMA) gathering strong downward momentum at 1.1325. Technical indicators are turning marginally higher after reaching oversold readings, reflecting the near-term bounce rather than suggesting the pair has found an interim bottom.”
Bednarik adds: “Once the October low near 1.1150 gives up, EUR/USD can extend its slide initially towards the 1.1100 area, and then towards 1.1060. The next relevant support is the 1.1000 psychological threshold, although it seems unlikely that the pair will reach such a level just with the CPI release. Conversely, an extension of the ongoing recovery would meet initial resistance at around 1.1260, while once the area is cleared, the rally can continue towards the 1.1320 price zone.”
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.