On Wednesday, the data revealed that the U.S. Consumer Price Index (CPI) rose by 0.2% last month, mirroring the increase seen in July. Over the past 12 months ending in August, the CPI grew by 2.5%, marking the slowest annual increase since February 2021 and down from the 2.9% gain in July. However, when excluding the more volatile food and energy categories, the core CPI rose by 0.3% in August, following a 0.2% increase in July, slightly surpassing the expected 0.3% rise. 

(U.S Inflation data, Source: LSEG Data stream) 

This data significantly reduces the probability of a 50-basis-point rate cut from the Federal Reserve in next week. This outcome was anticipated, as the market’s expectations for such a large rate cut in September seemed overly optimistic. The Fed’s focus remains on labour market data, making employment numbers and their revisions even more crucial. 

With expectations of a smaller 25 bps cut instead of 50 bps, market sentiment appears somewhat cautious. A minor correctional bounce for the dollar is anticipated in September, followed by a renewed weakening toward the end of 2024 and into 2025. However, markets have still priced in 104 basis points of cuts by year-end, suggesting that a 50-basis-point rate cut is expected at either the November or December meeting. 

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