US Interest Rate Forecast: CPI to Test December Fed Hike Bets

The interest rate outlook for the US faces a key test as markets await the CPI report for September on October 14. The price pressures remain persistent and keep a December Fed hike in focus, while weaker consumer confidence calls for caution. The expected gap in the interest rates between the Fed and the ECB also matters for EUR/USD, which is approaching the support zone of 1.11-1.12. In my view, a pause in October remains the base case, but strong inflation could support a December interest rate hike. This article presents the key drivers of US interest rates and the key levels for the EUR/USD that may shape the next move in the pair.

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US Interest Rate Forecast: CPI and December Fed Hike Risks

Governor Christopher Waller said that 16 of 18 policymakers had projected at least one more hike this year. He expects further increases in the interest rates if the economy develops as anticipated. But he also said that hikes need not come at consecutive meetings. That leaves room for the rate pause in October without removing the risk of an increase in December.

The inflation signals from last weeks data support that cautious approach. The ISM services report released on October 5 showed continued expansion with the headline index at 54.9.

The price index rose to 74.0 from 72.6, which is the highest since July 2022.

Businesses still face pressure from fuel, tariffs and labor costs. Meanwhile, Michigans preliminary survey showed the expectations of one-year inflation rising to 4.7% and longer-run expectations reaching 3.5%.

The consumer sentiment dropped to 46.3 from 48.1. This data shows why weaker confidence alone may not persuade the Fed to ease.

EUR/USD Price Forecast

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The labor market also gives the Fed room to fight inflation. The chart below shows that the jobless claims dropped to 197,000, down 2,000 from the revised figure of the previous week. These readings suggest that the layoffs remain limited.

But the continuing claims increased by 17,000 to 1.716 million, which may signal slower progress back into work. The balance favors caution on the pace of tightening. A sustained increase in claims would strengthen the case for delaying another hike by the Fed.

The cost of borrowing already remains high. The two-year Treasury yield remains at 4.797% while the 10-year US Treasury yield remains at 5.237%. These yields reflect several forces that include the risk of inflation and the expected policy path.

The September CPI report will be released on October 14, which will provide the next key test. In my view, the pause in October followed by the quarter-point increase in December remains a reasonable base case. That would take the target range to 4.00%-4.25%. The soft inflation and clear labor weakness could delay that move.

EUR/USD Forecast: Fed–ECB Rate Gap and Key Support Levels

The gap between European and US interest rates remains central to the movement in EUR/USD. The deposit rate of the ECB stands at 2.50%, below the target range of 3.75%-4.00%. That gives US rates an advantage of 1.25%-1.50%.

The ECB accounts released on October 8 describe the discussion of September, in which the growth in wages was moderating and broader effects from the energy shock remained limited. This supports a measured approach to further tightening. If the Fed increases the interest rates while the ECB pauses, the wider gap could support the dollar.

The demand of the Eurozone also argues for caution. The chart below shows that the retail sales of August increased by 0.1% after a 0.6% fall in July. This modest recovery could make the ECB cautious about adding pressure through higher interest rates.

A stronger US CPI report could reinforce the expectations for the Fed hike and weigh on the pair. The soft US inflation could reduce that pressure while a stronger expected ECB response could support the euro. In my view, the next move in EUR/USD will depend heavily on the changes in the incoming data and the expected rate gap between the Fed and the ECB.

From a technical perspective, EUR/USD remains under pressure in the short term due to the strong movements in the US dollar index. Since the US dollar index has broken above the 102 level, the EUR/USD is approaching the key support zone around the 1.12 level.

The monthly chart below shows that EUR/USD broke the rising wedge pattern in March 2025 at 1.11. This rising wedge pattern extends from the highs of April 2008. This breakout keeps the bullish structure intact in the long term and suggests that EUR/USD may rally towards a higher level.

EUR/USD reached near the first target of this breakout at 1.22, but the pair failed to break this level. However, the high of January 2026 was 1.20828, which was very close to the 1.22 level. After marking this high, the pair started to drop towards the support zone between 1.11 and 1.12. If this support zone holds, the pair may initiate another rally towards the 1.22 level.

The strong support in EUR/USD is also highlighted on the weekly chart. The chart shows that the pair has broken the key support at 1.1360 and is now pushing below the 1.1240 area, which was strong support.

The key support zone in EUR/USD remains between 1.11 and 1.1240. A break below 1.11 will likely introduce another strong drop in the pair towards the 1.06 level.

On the other hand, a quick recovery above 1.1360 will indicate that the correction is over and the pair will likely rally towards the 1.16 level in the short term. A break above 1.16 will likely confirm a bottom and initiate a strong rally towards the 1.22 level.

The daily chart also shows the importance of this support. The chart shows that the pair has reached the lower boundary of a descending channel pattern that stretches from the January 2026 highs. But the 50-day SMA remains below the 200-day SMA and the price remains well below the averages. But the RSI has reached extremely oversold levels, which suggests a rebound from the 1.11 to 1.12 support zone.

If the rebound develops from these levels, the immediate resistance will be 1.1330. A break above the 1.1330 to 1.1360 zone will likely open the way for a rally towards the 50-day SMA at around the 1.16 level.

What to Watch Next

The CPI report for September will be released on October 14. This report will provide the next key test for US interest rates. The strong inflation could reinforce the case for a rate hike in December. But the soft inflation could give the Fed more time to assess the economy. In my view, a pause in October followed by a quarter-point increase in December remains a reasonable base case.

The market will also watch jobless claims and fresh signals from ECB. The low layoffs give the Fed room to tighten while the increase in continuing claims calls for caution. If markets expect the Fed to raise rates faster than the ECB, the US dollar could gain support. A narrower expected gap in the interest rates could support a recovery in the EUR/USD.

For EUR/USD, the support zone of 1.11-1.12 remains important. A break below 1.11 could open the way towards 1.06. But a recovery above 1.1360 would strengthen the rebound towards 1.16. A clear break above 1.16 could then bring 1.22 back into focus if the expectations for the US rate hike ease.

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