The probability of the Federal Reserve (Fed) rate hike fell sharply ahead of the inflation data release (Consumer Price Index).
As of Tuesday evening, markets estimate the probability of the Fed rate hike on November, 1 at just 12%, down from about 27% on Friday. The probability of a rate hike by December, 13 has dropped to 26% from 42%.
The stakes for Thursday's consumer price index inflation report just got a lot lower. Federal Reserve policymakers are now indicating that the upsurge in the 10-year Treasury yield has reduced already low odds for a rate hike on November, 1.
Dallas Fed President Lorie Logan, who has always maintained a tough hawkish position, said that there may be less need to raise the federal funds rate because of higher long-term interest rates.
The 10-year Treasury yield rose to a 16-year high of 4.89% shortly after Friday's employment report showed 336,000 new jobs. Hours later, it fell to 4.78% and it still keeps falling. On Tuesday, the 10-year yield slid to 4.65%.
The Fed's primary inflation rate, the core consumer price index, showed that price pressures have eased dramatically in three months.
On an annualized basis, the core PCE inflation is just 2.1 %, down from 3.1 % in July.
However, Fed Chairman Jerome Powell said the Fed needs to see six months of modest data to gain confidence in the trend.
The key data for the core inflation report at the end of the month will be the Producer Price Index (PPI). The PPI measure of health care price inflation is directly dependent on PCE data.
Dallas Fed President Lorie Logan highlighted the reason for the higher yield on 10-year Treasury yields as an important factor. The level of 10-year yields compensates bondholders for two things: expected inflation and everything else. For example, the risk that yields will rise over time, reducing the value of long-term bonds bought today.
If 10-year Treasury yields were rising in tandem with rising inflation expectations, there would be no reason for the Fed to pause rate hikes.
Now, it is expected that the US inflation data will be released on Thursday. If the data is weaker than forecasted, it will imply buying EURUSD in the short term.
The final recommendation is to buy EURUSD if the actual CPI is weaker than the forecasted value.
Otherwise, if the actual CPI is higher than forecasted it will imply selling EURUSD.
Profit or loss is fixed two hours after the data publication.