The next couple of days have some key data that could shake up the dollar. The reaction in the charts could be bigger, because even though they are on different days, the second release is before the market opens. And there have been some complicating factors in how to interpret what the impact means.

Setting up for the last hike

After its last meeting, the Fed insisted that there would likely be another rate hike before the year is done. But, there are only two more rate hike meetings this year, and there will be time for only one more bit of inflation data before the next meeting. Which means that the information that will be available now is what will likely be the deciding factor for whether or not the Fed hikes.

Almost two-thirds of traders expect that the Fed won’t go through with the hike. But, after Friday’s surprise jobs numbers, the market is pricing in around a 42% chance of a rate hike in November. If inflation doesn’t come in as expected, those expectations could shift, and potentially push the dollar even higher.

Keeping the dollar up

What’s been driving the dollar higher is the progressively increasing yields on US bonds. That’s because the markets are starting to accept that rates will remain high for a long time, for a variety of reasons. But, higher yields have the same effect as hiking interest rates, something that already one FOMC member has pointed out.

So, one of the key things that investors are going to be interested in when the FOMC minutes are released tomorrow, is just how much weight does the Fed put on yields. There is an important distinction, in that the Fed directly controls the target interest rate, while yields fluctuate according to the market. The Fed might want to have a more direct hand in pushing up borrowing costs – or they might be happy to let the market do their job for them. That might become clearer from the minutes.

What the data says

After the FOMC minutes, the big data release of the week is on Thursday with US September CPI figures. Here, headline inflation is expected to rise for the third time in a row, hitting 3.8% compared to 3.7% prior. That is largely seen being caused by higher gasoline prices.

The Fed cares more about the core rate, excluding the more volatile elements of food and energy. Here, the core CPI change is expected to diminish 4.1% from 4.3%. That’s still more than double the target rate, but continuing in the right direction for the Fed to give up on the hiking.

The thing is, there is a relatively short distance between 4.1% and 4.3%, so if the core rate overshoots by just two or three decimals, the market could get worried the Fed might actually go through with a rate hike. That could give the greenback a substantial boost. On the other hand, a if inflation is well below expectations, it would only affirm an expectation that the market already has about rates staying steady from now on.

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