Inflation Report and Rate Decision Outlook

EUR: Might slip back to 1.0600 in a hawkish Fed.

Yesterday, the EUR/USD experienced a brief surge in value, but it appears that market participants are maintaining their positions in the US dollar in a hawkish stance from the Federal Reserve. And will continue to hold longs on US dollar as the FED did the revision to the 2024 dot plot, as mentioned earlier, which could act as a limiting factor for the currency pair's upward movement during today.

In addition, there are no significant data releases scheduled for the eurozone today, except for construction output figures, and there are no planned speeches by ECB officials. The contrasting monetary policies between the eurozone, which is leaning toward a dovish stance, and the US, which is expected to maintain a hawkish position, are likely to hinder any substantial rebound possibilities for the EUR/USD. However, my primary scenario suggests that the outcome of today's meeting will keep the pair trading within the range of 1.0650 to 1.0700.

Should the 2024 dot plot be revised upward, and the outcome of the meeting prove to be more hawkish than anticipated, it could push the EUR/USD back below the 1.0600 mark. Ultimately, the direction of the US economic data is expected to regain prominence in driving the currency pair's movements soon.

GBP: Big CPI miss makes today's BoE meeting an even closer call.

Yesterday on the afternoon, significant underperformance of UK inflation is raising substantial uncertainties regarding the likelihood of the Bank of England raising interest rates today. In August, the headline Consumer Price Index (CPI) decelerated from 6.8% to 6.7%, contrary to expectations of a rebound to 7.0%. Of particular concern is the substantial slowdown in core inflation, which dropped from 6.9% to 6.2%, well below the consensus estimate of 6.8%. Service inflation, a key focus for the Bank of England, also decreased from 7.4% to 6.8%, falling below the bank's own August forecast. This decline is primarily attributed to lower airfares and package holiday prices, which is somewhat unusual for August, although there were improvements in other sectors of the economy.

As I highlighted in my Bank of England preview, this upcoming meeting was already finely balanced, and the unexpected decline in inflation makes the announcement today even more intriguing. Nevertheless, our economic experts are still leaning slightly towards the possibility of one final rate hike. If my assessment proves accurate, there is evidently more room for a positive outcome for the GBP, especially given the pound's decline following today's post-CPI report.

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