As we approach Tuesday's (November 10th) US CPI report, a more intriguing prospect arises: what if inflation cools, and the Federal Reserve simply decides to ignore it? This is quite possible. Wall Street expects a soft October inflation reading, but it shouldn't be assumed too quickly that this will be enough to change the Fed's thinking ahead of its December meeting. The consensus forecast is for overall inflation to rise 0.3% month-over-month, down from 0.6% in September; core inflation is expected to slow to 0.2%, down from 0.3% in the previous month.

Institutional forecasts: Morgan Stanley sees an overall gain of 0.2% and a core gain of 0.19%, while Bank of America says the 0.2% target remains locked in for December.

Wall Street's expectations for October inflation are generally soft, but there are subtle differences among institutions regarding "how soft it needs to be to change the policy path." Morgan Stanley expects overall CPI to rise by only 0.2% month-on-month, with core inflation even lower at 0.19%. Their logic is that after unusually strong housing, hotel, airfare, and education costs in September, these components are expected to return to normal in October, thus dragging down the core reading. Bank of America also leans towards a lower overall level of 0.2%, but takes a more hawkish stance on the policy implications of the core reading: even if core inflation reaches 0.2%, it will still effectively lock in a December rate hike because "only an indisputable 0.1% soft reading can affect the calculation." This disagreement stems from the fact that the market consensus of 0.2% core inflation is already within the comfortable range of "locking in a rate hike." The threshold that would truly force the Fed and the market to reassess their December actions has been raised to 0.1%, which is a low-probability scenario. In other words, most institutions have already factored in the basic scenario of "inflation cooling down but interest rate hikes remaining unchanged." Unless there are extreme downward surprises in the data, the policy path is unlikely to undergo any substantial adjustments.

Market pricing: The probability of a December rate hike is about 84%, with more room for unexpected downside.

Current pricing in federal funds futures indicates that the probability of a 25 basis point rate hike in December has risen to approximately 84%, suggesting that traders have little expectation that today's inflation report will deviate the Fed from its established path. The market is heavily priced in a scenario of "cooling inflation but continued rate hikes," leaving almost no room for policy shift. This high degree of consensus pricing creates an important asymmetry: if the data unexpectedly falls short, the potential for disappointment is much greater; conversely, a reading that merely reinforces existing expectations offers limited further euphoria. In other words, the market has fully priced in a "cooling inflation but no change in rate hikes" scenario, so if the data aligns with consensus, the upside for the dollar is limited; conversely, if the reading is significantly weaker than expected, the downside risk for the dollar is greater. Traders positioning themselves before the report should focus more on the potential impact of a downside surprise on risk assets and the dollar, rather than an upside surprise. The pricing asymmetry itself suggests that the dollar's reaction after the data release may be biased towards weakness.

US Dollar Outlook: Already ahead of short-term interest rate differentials, requires a hawkish surprise to maintain its strength.

The dollar's future performance faces a test amid the prospect of "cooling inflation but the Fed still likely to raise rates." Some institutions have explicitly warned that the dollar has already outpaced short-term interest rate differentials, suggesting its recent strength has partially priced in rate hike expectations. Even an inflation report sufficient to keep the Fed on its rate hike path may not provide new reasons for dollar bulls to celebrate. In other words, data in line with expectations is unlikely to provide new momentum; only a significant hawkish surprise—such as core inflation significantly higher than expected—could extend the dollar's recent rally. Based on this assessment, the institution has set its year-end target for the euro against the dollar at 1.12 and for the dollar against the yen at 155, implying a relative weakening of the dollar. This suggests that the dollar's strength is partly based on the pricing of a "nearly locked-in rate hike." If today's report only confirms rather than reinforces this narrative, the upward momentum of the bulls will be limited. The market is therefore more likely to shift its focus to factors beyond interest rate differentials after the data release, and further dollar strength will require additional hawkish catalysts.

Statistical Note: No year-on-year comparison; monthly readings have higher weighting.

Today's release also presents a statistical peculiarity. Due to the government shutdown last year, data for October 2025 is completely missing, and the Bureau of Labor Statistics will not release the usual annual inflation comparison. Consequently, the market lacks an official year-over-year reading as an anchor, significantly increasing the weight of month-over-month data. In the larger picture, the real question today is not only whether inflationary pressures show signs of cooling, but also whether these signs are interpreted by the Federal Reserve and the market as "cooling enough to force a rethink of December." Based on current pricing and institutional positions, the answer is most likely no. The monthly reading will become the only reliable official signal, and its subtle changes will directly dominate short-term trading reactions. Traders should focus on the precise level of the core month-over-month figure when interpreting the data, rather than attempting to extrapolate the missing year-over-year figure. This unique statistical environment further amplifies the marginal impact of the monthly reading on policy expectations and the dollar's trajectory.

in conclusion

Wall Street expects October's overall CPI to rise 0.3% month-on-month and core CPI to rise 0.2%, a slowdown from September. Morgan Stanley forecasts 0.2% overall and 0.19% core, while Bank of America believes a 0.2% core figure will still lock in a December rate hike, with only a softer reading of 0.1% changing the calculation. The market is pricing in an 84% probability of a December rate hike, fully reflecting the scenario of "cooling but not changing the rate hike"—meaning limited upside for the dollar if the data meets expectations, and greater downside risks if it is weak. Institutions warn that the dollar has outpaced short-term interest rate differentials and needs a hawkish surprise to maintain its strength, with year-end targets of EUR/USD 1.12 and USD/JPY 155. Due to the lack of October 2025 data and no year-on-year comparison, monthly readings have a higher weighting; the real question today is whether inflation is considered to have cooled enough to force the Fed and the market to rethink December—and based on current pricing, the answer is most likely no.