US CPI headline inflation set to rise 3.1% YoY in September

• The US Consumer Price Index is set to rise 3.1% YoY in September, at a faster pace than August's 2.9% increase.
• The Fed is widely expected to cut the monetary policy rate by 25 basis points next week.
• September inflation data could significantly influence the US Dollar's valuation.

The United States (US) Bureau of Labor Statistics (BLS) will publish the all-important Consumer Price Index (CPI) data for September on Friday at 12:30 GMT.

Markets will look for fresh signs of how US President Donald Trump's tariffs are feeding through to prices. Therefore, the US Dollar (USD) could experience volatility on the CPI release, as the data could influence the Federal Reserve's (Fed) interest rate outlook for the remainder of the year.

What to expect in the next CPI data report?

As measured by the change in the CPI, inflation in the US is expected to rise at an annual rate of 3.1% in September, the highest since May 2024, following a 2.9% increase in August. The core CPI inflation, which excludes the volatile food and energy categories, is forecast to rise 3.1% year-over-year (YoY), matching the previous month's increase.

Over the month, the CPI and the core CPI are expected to advance by 0.4% and 0.3%, respectively.

TD Securities analysts believe that the September CPI report will highlight a slowdown in core inflation, led by cooling services prices, especially in housing, but expect a likely acceleration in goods inflation that reflects more tariff pass-through. "A still firm core should again result in a steady headline CPI at 0.4% m/m as a jump in the energy segment likely also provided a notable boost to September prices," they add.

How could the US Consumer Price Index report affect the US Dollar?

Heading into the US inflation showdown on Friday, investors remain convinced that the Fed will opt for a 25-basis-point (bps) reduction in the monetary policy rate in October and December. According to the CME FedWatch Tool, markets are pricing in about a 97% probability of the policy rate falling from the current 4%-4.25% range to 3.5%-3.75% by the end of the year.

Because of the lack of key economic data releases due to the ongoing government shutdown in the US, September inflation figures will be scrutinized by Fed policymakers ahead of next week's meeting. Although investors are unlikely to change their minds about the October interest rate cut, a significant upside surprise, especially in the monthly core CPI print, could trigger an important market reaction. A reading of 0.5% could prompt investors to reassess the probability of a rate cut in December and help the USD outperform its rivals with the immediate reaction. Conversely, the market positioning suggests that the USD doesn't have much room left on the downside even if the CPI data does little or nothing to change the market's view of the Fed's rate outlook.

Commerzbank's FX Analyst Antje Praefcke notes that the price data could indicate the extent to which tariffs have pushed up consumer prices and elaborates further:

"However, the data is unlikely to be a game changer for next week's Fed meeting, as the majority of Fed members assume that any tariff effect on inflation will be temporary anyway. The dollar is already trending somewhat stronger ahead of the figures, but even an upward surprise in the price data is unlikely to deter the Fed from cutting rates next week."

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for the US Dollar Index (DXY) and explains:

"The technical outlook points to a bullish tilt in the short-term outlook. The Relative Strength Index (RSI) indicator on the daily chart climbs toward 60 and the USD Index holds comfortably above the 20-day, the 50-day and the 100-day Simple Moving Averages (SMAs)."

"On the upside, the Fibonacci 23.6% retracement of the January-July downtrend aligns as the next immediate resistance level at 99.50. A daily close above this level could attract technical buyers and open the door for a leg higher toward 100.00 (round level) and 100.80 (200-day SMA)."

"Looking south, the 20-day SMA aligns as an interim support level near 98.50 ahead of 98.10-98.00 (50-day SMA, 100-day SMA, round level) and 96.40 (end-point of the downtrend)."