Inflation Shock Ahead? ING Forecasts Scenario of Dollar Strength Returning

Inflation Shock Ahead? ING Forecasts Scenario of Dollar Strength Returning In Brief: ING projects US headline monthly inflation at 0.7% and core inflation at 0.3%, both above market consensus, which could support the dollar. The probability priced in for a Federal Reserve rate hike in October is about 20%; for this probability to exceed 50%, it would likely […]

ING predicts monthly US inflation of 0.7% and core inflation of 0.3%; Both figures are higher than market consensus expectations and could support the dollar.

The priced probability of a Federal Reserve interest rate hike in October is around 20%; Much stronger inflation data would probably be needed to push this probability past 50%.

ING maintains one-month EURUSD target at 1.13, but suggests a retest of the 1.1150-1.1160 range should the dollar strengthen.

After retreating in recent trading, the US dollar faces an opportunity to regain strength ahead of the release of September inflation data. ING predicts US monthly inflation to be higher than market expectations; An event that can strengthen expectations for the continuation of the contractionary policy of the Federal Reserve and prevent the dollar from falling further.

On the other side of the market, the euro has not been able to get rid of the pressure caused by the financial risks of France. Despite keeping the one-month target of EURUSD in the range of 1.13, ING suggests the possibility of this currency pair returning to the range of 1.1150 to 1.1160.

This report of Ambassador Arjan was prepared based on the analysis published on the ING website and translated and rewritten for the Persian speaking audience.

forecasting higher inflation; Why might the dollar strengthen again?

The dollar weakened in recent transactions; Because a large number of traders had previously counted on its strengthening and the value of the dollar was higher than the estimated level based on fundamental factors in the short term. At the same time, the recovery in the global bond market has helped increase investors' appetite for riskier assets, reducing the attractiveness of the dollar as a safe-haven asset.

The comments of John Williams from the Federal Reserve also affected the market atmosphere. He still expects the interest rate to increase once again this year, but he believes that there are signs of a reduction in inflation and there will be no need for further contraction in 2027.

That view is in line with the Fed's median forecast, but different from what the market has priced in for three rate hikes through June. This difference shows that the market's expectations regarding the future path of interest rates can still be sensitive to economic data.

Now the US September inflation report has become one of the most important short-term drivers of the currency market. If the data comes out better than expected, it may offset some of the recent pressure on the dollar and strengthen expectations for an interest rate hike in October or later.

✔️ Read more: Three Federal Reserve officials said about continuing the fight against inflation; Williams considers rate hikes unlikely in 2027

General and core inflation of the United States; What figures is the market waiting for?

The consensus forecast of the market shows that the US consumer price index increased by 0.6% in September compared to the previous month and core inflation also increased by 0.2%. Core inflation measures the change in prices excluding food and energy and is important for evaluating the underlying trend of inflation.

In contrast, ING's macroeconomic team expects headline inflation to reach 0.7 percent and core inflation to reach 0.3 percent. The realization of these forecasts could remind the market that the trend of deflation is not yet certain enough to completely eliminate the possibility of interest rate hikes.

However, the release of slightly higher-than-consensus numbers does not necessarily mean the Fed will raise interest rates in October. ING believes that in order for the probability of interest rate increase to exceed 50% again in this meeting, much higher figures are needed: total inflation close to 1% monthly or core inflation at the level of 0.4%.

At the time of the ING report, the priced-in probability of an October interest rate hike was around 20 percent. Therefore, the market must distinguish between data that merely supports the dollar and data that meaningfully increases the likelihood of the Fed changing its mind.

Can the inflation report strengthen the support floor of the dollar?

In ING's view, even if inflation is not high enough to make an October rate hike the dominant scenario, a stronger-than-expected data release could maintain expectations for continued contractionary policy in the coming months.

This issue is important for the dollar; Because the forex market not only reacts to the decision of the next meeting of the Federal Reserve, but also includes the general path of the interest rate in the prices.

As a result, higher inflation could prevent the dollar from falling further without raising the possibility of an October interest rate hike to more than 50 percent. However, if the data comes in as expected or below, the pressure from the dollar's extensive buying positions is likely to re-emerge.

The euro is still under the pressure of French financial risks

In the Euro market, the return of EURUSD to the 1.120 range is not a sign of a sustainable improvement of this currency. ING emphasizes that this move is mainly due to the weakening of the dollar and the euro has not yet shown significant strength against other currencies.

One of the main reasons for this situation is France's financial risks. Investors remain sensitive to the French government's debt outlook, and this concern is reflected in a higher risk premium in the valuation of the euro.

The yield difference between French and German 10-year bonds decreased by 5 basis points yesterday and reached 137 basis points. However, ING attributed the change to a general improvement in the bond market rather than a lasting easing of concerns about France's financial situation.

As long as France-specific risks weigh on the euro, even a temporary easing of concerns in the bond market may not be enough to create a sustained bullish trend in the EURUSD.

EURUSD on the way to 1.1150 or back to 1.13?

ING maintains one-month EURUSD target in the 1.13 range; But this outlook comes with short-term downside risk.

EURUSD may test the 1.1150-1.1160 range if US inflation data comes out higher than expected and the dollar strengthens again. This scenario comes up in a situation where the Euro is still facing pressure from France's financial concerns.

On the other hand, US deflation or a weak market reaction to the data could ease the pressure on the euro. However, for the EURUSD to continue to improve, it will also be important to ease concerns related to France.

Therefore, the 1.13 target remains valid from ING's point of view, but the path to it may be accompanied by volatility and retesting of recent lows.

summary; Two determining factors for the dollar and the euro

The US inflation report can determine the direction of the dollar in the short term, but its importance is not limited to the possibility of an interest rate hike in October. A better-than-expected data may bolster expectations for continued Fed tightening and support the dollar, even if not enough to change the decision at the October meeting.

On the other hand, the financial risks of France continue to prevent a strong return of the euro. ING maintains the one-month EURUSD target at 1.13, but also considers a possible drop back to the 1.1150-1.1160 range.

As a result, the market's reaction to US inflation and developments in the French bond market will be two key factors to evaluate the future path of the dollar and the euro.