US CPI to Test 80% Rate-Hike Odds as USD/JPY Bulls Return

US consumer prices due Wednesday will test the 80 percent market-implied chance of a Federal Reserve rate hike this year, a call that could swing USD/JPY after two weeks of intervention-driven gains.

"If we get a July CPI report anywhere near my forecast, the balance of the committee is going to look right through the supply shock, and the FOMC will remain on hold for the remainder of the year," Joe Brusuelas, chief economist at RSM, said.

Economists expect the consumer price index to rise 0.1 percent on the month and 0.2 percent on the core gauge that strips out food and energy, according to the Dow Jones consensus. Annual readings are forecast at 3.4 percent and 2.5 percent respectively, each down a tenth of a point from June, when the headline rate fell 0.4 percent and core was flat on receding energy prices and moderating shelter costs. The data lands two weeks after the Bank of Japan and the US Treasury Department jointly intervened in USD/JPY, a move that bulls have since been clawing back.

A hot print would reinforce the roughly 80 percent probability that rates markets assign to at least one quarter-point hike by year-end, strengthening the dollar against the yen and complicating the intervention narrative. A cool reading would weaken the dollar and push the September Federal Open Market Committee meeting, now a coin flip, toward a hold. The Fed left its target at 3.5 percent to 3.75 percent in July on a 9-3 vote, with three dissenters favoring an increase.

Rate path hinges on two months of data

The Fed skips an August meeting, giving officials both the July and August inflation readings before they next decide policy at the September 17-18 gathering. Governor Lisa Cook has said she sees the need to hike if inflation data do not cooperate, while Cleveland Fed President Beth Hammack said Monday that one 25-basis-point move probably would not do much for the economy, suggesting multiple increases may be needed. "I'm squarely focused, because we have this stability in the labor market, that we can bring inflation back down to target," Hammack said in a Yahoo Finance interview.

Bank of America still calls for three rate increases in coming months, arguing in a client note that the July jobs report "didn't change the overall picture on the labor market — it's stable." The firm said that if the Fed's preferred inflation gauge averages 0.25 percent increases over the next two months, "it is all but guaranteed that the Fed will begin hiking rates in September." An average below 0.2 percent would delay an increase, while anything in between makes September a coin flip resting on Chair Kevin Warsh, who took the post in May.

Intervention sets the FX stakes

The BoJ and Treasury's joint action roughly two weeks ago marked the first coordinated intervention in the pair in years, and the subsequent rebound in USD/JPY has made the CPI report the key test for currency traders. The last time the pair moved this sharply on a single data point was the June inflation report, when the headline decline of 0.4 percent helped pull the dollar lower before the intervention. A repeat of that softness would test whether the authorities are willing to defend the yen again; a hot number would confirm their move and give bulls fresh momentum.

The stakes extend beyond the currency. A hotter-than-expected CPI would lift Treasury yields and pressure equities, following the pattern seen in July when war-driven oil gains and rate-hike bets pushed the 10-year yield to levels last seen in January 2025. A cool print, by contrast, would ease the pressure on the Fed and support risk assets, while complicating the case for the three hikes Bank of America projects.

This article is for informational purposes only and does not constitute investment advice.