The US Consumer Price Index (CPI) is expected to increase by 3.1% year-on-year (YoY) in September, up from August’s 2.9% rise. The Federal Reserve is likely to lower the monetary policy rate by 25 basis points next week.
The Bureau of Labor Statistics will publish the CPI data for September on Friday at 12:30 GMT, which could affect the US Dollar’s value. The CPI and core CPI are projected to increase monthly by 0.4% and 0.3%, respectively.
Federal Reserve’s Dual Mandate
The Federal Reserve has two main goals: keeping prices stable and achieving maximum employment, targeting inflation around 2% YoY. Inflation remains high due to supply-chain issues, and the Fed is expected to maintain a tough approach.
Analysts believe there is a 97% chance of a Fed rate cut to 3.5%-3.75% by the end of the year. If the CPI data is surprising, it could lead to market changes that affect interest rates.
The Federal Reserve makes monetary policy decisions at its eight meetings each year. It uses tools like Quantitative Easing and tightening during extreme economic situations, which impacts the strength of the US Dollar.
The current market is vastly different from what was expected late last year, when a rate cut was anticipated. Now, the Fed Funds Rate remains steady at 5.0% to 5.25%, with no cuts expected through the end of 2025. This shift from anticipating cuts to a hold has been a key focus for traders this year.
Inflation and Interest Rates
Back then, the forecast of a 3.1% inflation rate seemed overly optimistic. The latest CPI report for September 2025 revealed that inflation was stickier than expected at 3.8% year-over-year, largely due to ongoing costs in the service sector. This persistence in pricing pressure is why the Fed is no longer discussing rate cuts in the near term.
As a result, the US Dollar Index (DXY) is not hovering around the 99.50 resistance level discussed earlier. Instead, the DXY has mostly stabilized around the 108 mark during the third quarter, benefiting from a significant interest rate difference with other major economies. Traders should be careful about betting against the dollar while the Fed keeps its hawkish stance.
For those trading derivatives, the landscape of volatility has changed. Instead of focusing on the timing of rate cuts, the emphasis has shifted to options that protect against a prolonged “higher-for-longer” period. Interest in VIX futures and call options on the US Dollar is increasing, reflecting uncertainty about how long tight monetary policy will continue.
In the interest rate derivatives market, the strategy has changed. Traders are no longer positioning for quick cuts. They’re now using SOFR futures to hedge against the chance of one more rate hike or further delay in cuts, possibly lasting into late 2026. This is quite different from the market sentiment from late 2024, which had anticipated multiple cuts this year.
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