US September Core CPI Exceeds Expectations, Bolstering Fed Rate Hike Speculation
| Pair | Now | Since publish |
|---|---|---|
| EURUSD | — | — |
| USDCHF | — | — |
- US Sep CPI hot; Goolsbee calls it “discouraging”, cites AI.
- October Fed hike chance drops to 25%; December now favored.
- USD gains faded, yields eased; rate cuts pushed to mid-2027.
The US Consumer Price Index (CPI) for September revealed headline inflation increased 0.6% month-over-month and 3.7% year-over-year, slightly above the 3.6% annual forecast. More significantly, core CPI, which excludes volatile food and energy prices, rose 0.3% month-over-month and 2.6% year-over-year, surpassing the 0.2% and 2.5% expectations, respectively. This hotter-than-anticipated core reading was primarily driven by increases in shelter, energy, airfares, and used vehicles. Following the data release, market participants increased the probability of a Federal Reserve rate hike in October to 47%, up from 21% prior to the report, with 36 basis points of tightening now priced in for the remainder of the year. This shift in expectations has provided support for the US Dollar, as traders assess the implications for the Fed’s monetary policy outlook.
Following hotter-than-expected US inflation data, the US Dollar (USD) strengthened significantly, with the US Dollar Index (DXY) climbing toward 102.85, its strongest level since April 2025. The USD/CHF pair rose to 0.8390, reaching its highest level since May 2025, while the Mexican Peso depreciated, pushing USD/MXN to 18.51 and a high of 18.60. These movements were driven by reinforced expectations of further Federal Reserve (Fed) interest rate hikes, with some market participants now anticipating a move at the October meeting. September’s headline CPI was reported at 3.7% year-over-year (up from 3.4%) and 0.6% month-over-month, exceeding estimates.
Following the inflation data, Chicago Fed President Austan Goolsbee described the CPI as “discouraging,” while the latest Beige Book flagged diesel-fuelled price pressure impacting freight, farming, and airfares, raising concerns about second-round inflation effects. Markets are now pricing close to a 40% chance of a Fed rate hike at the October 27-28 meeting, despite some officials previously guiding expectations toward December. Notably, Citi has shifted its forecast to anticipate a December Fed rate hike, removing one of the last prominent holdouts against such a move. This reinforces a “higher-for-longer” interest rate path, with expectations for rate cuts now pushed out to mid-2027, continuing to support US Treasury yields and the US Dollar, while keeping mortgage rates under upward pressure and weighing on rate-sensitive assets.
Following the initial surge, US Dollar (USD) gains have faded, and the initial rise in US Treasury yields has also subsided. Equities are reportedly under pressure. Looking ahead, markets are anticipating further economic data, including the September Producer Price Index (PPI), which will serve as another key inflation test.
Market expectations for a Federal Reserve rate hike at the upcoming meeting have intensified, with the Overnight Index Swap (OIS) curve now implying close to a 50% chance of such a move. Federal Reserve officials Barkin and Bowman have also joined Chicago Fed President Goolsbee in expressing ongoing concern over US inflation. Looking ahead, UOB’s Alvin Liew projects that Headline CPI will remain above 3% through 2026, potentially nearing 4% if energy costs stay elevated, with a gradual easing towards 2% anticipated in 2027.
Chicago Fed President Austan Goolsbee has introduced AI demand as a potential new driver that could keep inflation elevated, stating it would need to be addressed if it leads to overheating. Meanwhile, the September Producer Price Index (PPI) readings are reported to have supported a potential Federal Reserve rate hike. However, market expectations for an October 27-28 Fed rate hike have significantly decreased to 25%, a notable drop from previous estimates of 40% and 50%. Consequently, December is now increasingly viewed as the more likely timing for the next US rate increase.