CPI Keeps Fed Cut Hopes Alive, Focus Shifts to Retail Sales

US consumer prices offered traders a dose of relief, keeping September Fed rate cut expectations intact despite signs of firming in underlying inflation. Headline CPI showed goods prices rising only modestly, tempering fears that tariff-driven cost pressures could spill into broader inflation trends. Core inflation, however, registered its fastest gain since January, hinting at stickier price dynamics ahead.

For markets, the takeaway is clear, inflation isn’t hot enough to derail policy easing, allowing the Federal Reserve to keep its attention on a labor market that’s showing signs of fatigue. Weakness in revised payroll data has reinforced the case for a September “insurance cut,” with traders largely pricing in a 25-basis point move. Still, Fed policymakers have yet to commit, and the path forward will hinge on incoming data.

Next up is Friday’s US retail sales report, a pivotal gauge of consumer resilience that will either validate corporate optimism from earnings season or reinforce concerns about slowing household demand. Retail momentum will be critical in shaping whether the Fed’s next move is a modest trim or a more aggressive 50-basis-point cut, as some in the administration are openly advocating.

The US dollar steadied in Asian trade after a 0.4% drop in the prior session, pausing ahead of retail sales and geopolitical updates from the Russia – Ukraine front. The greenback’s safe haven bid has re-emerged in recent sessions, but rate expectations remain the dominant driver. Treasury markets are similarly range bound, with traders positioning for volatility around the week’s data releases.

Political noise remains in the backdrop. President Donald Trump renewed criticism of Fed Chair Jerome Powell and hinted at potential legal action over cost overruns in the Fed’s headquarters renovation. Treasury Secretary Scott Bessent suggested that, with earlier access to “original” data, the Fed could have cut rates in June or July  and hinted that a 50-basis point move in September should be on the table.

Trading Takeaway: With CPI behind us and rate cut expectations still intact, all eyes are on US retail sales. A strong print could temper dovish bets, lifting the dollar and yields, while a weak number would cement the case for deeper easing and risk-on positioning.

Disclaimer: This report is for informational purposes only. It does not constitute investment advice or represent the official views of any central bank or regulatory body.