US CPI Report Set to Tip Scales on Rate Hike Decision

Traders are uncertain about what the Federal Open Market Committee (FOMC) will do next month, with markets pricing in a 50/50 chance of a rate hike ahead of this week's US Consumer Price Index (CPI) report. The report is expected to be released on Wednesday at 8:30ET and will provide insight into inflation trends.

The FOMC has been keeping a close eye on inflation, with Chairman Kevin Warsh vowing to deliver 2% inflation. However, three of his FOMC colleagues dissented against the majority, arguing an immediate interest rate hike was needed to fend off inflation.

The US Dollar Index (DXY) is showing early signs of a potential bottom after the late July swoon, forming a bullish divergence with the 14-period RSI. A hot reading in the CPI report could tip the scales towards a September rate hike, while a benign print would buy time for the FOMC.

The Fed technically focuses on Core PCE when setting its policy, but traders consider the CPI report significant because it's released weeks earlier and has remained stubbornly above the 2% target for half a decade.