The dollar is trading steadily in the first half of the day and has shown no significant movements. The European session passed without any major volatility, and only the British pound managed to cause some short-term volatility for traders.

All attention today is focused on the August US Consumer Price Index report, and I expect it to produce a mixed picture. The headline figure will almost certainly accelerate. Producer prices have already increased by 0.4% month-on-month, fuel prices have risen sharply, and Brent closed above $107, so annual inflation could move up to 3.7% or 3.8%, compared with 3.4% in July.

The core component, which excludes energy and food prices, is likely to be more stable and remain near 2.5%. This creates a direct risk for the euro and the pound. If the market focuses on the higher headline figure, demand for the dollar will return, and both pairs will come under pressure, especially since their performance in recent days has largely been driven by US dollar weakness rather than their own strength. A stable core component would provide an argument for those supporting a pause, but the report will not provide a clear answer, and in my view, the reaction will be sharp but short-lived. The University of Michigan Consumer Sentiment Index and inflation expectations will also add to the agenda, and the Fed is paying particularly close attention to these indicators.

It is also worth discussing how sharply the market and economists differ in their assessment of the upcoming meeting. According to a survey of 48 respondents, only 13 expect a rate hike on September 15–16, or 27%, while the majority believe the rate will remain unchanged through the end of 2027. The market, meanwhile, is pricing in a 70% probability of a hike next week. A 43-percentage-point gap based on the same set of available data is significant in itself.

Economists also have a political argument in favor of a pause. The October meeting takes place only a few days before the November 3 election, and half of those surveyed believe that the Fed would act at such a time only if the economic data were very strong. But the most notable point is something else. There will be three dissenting votes regardless of the outcome. If the rate is left unchanged, Hammack, Kashkari, and Logan will dissent, as they did in July. If rates are raised, Bowman, Williams, and Waller will dissent. The Committee is so divided that any decision will represent a victory for one faction over another, making it almost impossible to predict in advance. This explains the market's nervousness and the increased importance of today's report.

Momentum

For the euro, 1.1605 is the key level on the upside. A break above this level opens the way toward 1.1631 and then 1.1653. I associate this scenario with stable core inflation, when the market concludes that the acceleration is limited to fuel prices and will not have a significant impact on the Fed's decision. On the downside, 1.1588 is the key level; a break below it would lead toward 1.1568 and 1.1550. This scenario would materialize if the headline figure comes in closer to the upper end of expectations and the market interprets it as confirmation of its expectations of a rate hike.

I will repeat what applies to any day with an inflation report. The first candle regularly gives a false signal: the price moves sharply in one direction and then reverses, while the spread widens significantly during these minutes. I enter only after the price consolidates beyond the level.

For the pound, the upward level is 1.3525, with targets at 1.3555 and 1.3596; on the downside, 1.3495, with a move toward 1.3474 and 1.3457. The British currency is following the dollar closely today, so the focus should be not on the pound itself but on the US dollar's reaction.

Mean Reversion

For the euro, the upper boundary is 1.1621. Here, I expect an unsuccessful attempt to break above the level, followed by a return below it; this return provides the sell signal. The level is noticeably above the breakout point at 1.1605, meaning that the pair can reach it only during a strong upward move. Therefore, selling from this level would be based on the assumption that the initial reaction to weak CPI data was excessive. The lower boundary at 1.1585 is traded in the opposite manner: buying after an unsuccessful break below the level. It is located very close to the breakout level at 1.1588, so in this area, what matters is not the initial touch but the price action afterward. If the price consolidates below the level, the breakout scenario is valid. If it rebounds back above the level, the mean-reversion scenario comes into play.

For the pound, the upper level is 1.3536. I am interested in a situation in which the pair moves above this level, fails to attract further buying, and quickly returns below it. I would look for selling only after the return below the level. Note that this level is above the breakout point at 1.3525, creating a sequence that is useful to anticipate in advance. First, the pound may break above 1.3525 and move higher, then reach 1.3536, fail to hold above it, and return below the level. Thus, the same upward move can first trigger the breakout scenario and then the mean-reversion scenario, and the two should not be confused.

The lower boundary for the pound is 1.3476, which is below the breakout level at 1.3495, with a relatively wide gap between them. This means that the price is unlikely to reach it without a significant move; a confident decline driven by a strong report would be required. I would consider buying there only if the move below the level is brief, sellers lose momentum, and the pair returns toward the level. If the pound consolidates below it, a mean-reversion scenario is no longer applicable; the breakout scenario is valid, with targets at 1.3474 and 1.3457. The stop-loss is placed beyond the extreme point of the brief move below the level.

There is also a general timing consideration for both pairs. Mean-reversion scenarios are valid today before the inflation report and after the market has stabilized. At the time of the release and during the following half hour, a move beyond a level is highly likely to be genuine rather than false, and trading against it would mean trading against an established move.