Fed Rate Hike Odds Hang in Balance as US Inflation Data Looms

Market uncertainty surrounding the US Federal Reserve's next move has traders on edge ahead of this week's inflation data release. The Consumer Price Index (CPI) report, due out on Wednesday at 8:30ET, is expected to show a 3.4% year-over-year increase in prices. Traders are pricing in almost exactly a 50/50 chance that the Fed will raise interest rates next month.

The US Dollar Index has been showing signs of forming a bottom, with potential for a more meaningful rebound if the CPI report tips the scales towards a September rate hike. The index has found support twice at the 99.40 level in August, forming a bullish divergence with the 14-period RSI. This could hint at a stronger dollar if inflation is higher than expected.

Fed Chairman Kevin Warsh has been under pressure to deliver on his promise of 2% inflation, but three FOMC members dissented against the majority's decision last month. The CPI report will be the first indication of which side of the Fed was more in tune with the current economy. A firm reading could force Warsh to demonstrate his commitment to action.