EUR/USD dives vertically to near 1.0320 in Wednesday’s North American session after failing to revisit the key resistance of 1.0400. The major currency pair weakens after the release of the hotter-than-expected United States (US) Consumer Price Index (CPI) data for January. The US Dollar (USD) strengthens after the inflation data, with the US Dollar Index (DXY) surging to near 108.50.
The US CPI report showed that annual core CPI inflation – which excludes volatile food and energy prices – rose at a faster pace of 3.3%, compared to a 3.2% increase in December. Economists expected the underlying inflation to have risen at a slower pace of 3.1%. In the same period, headline CPI inflation accelerated to 3% from the estimates and the former release of 2.9%. On month, headline and core CPI rose by 0.5% and 0.4%, respectively, faster than estimates of 0.3%.
A faster-than-expected growth in the inflation data has prompted market expectations that the Federal Reserve (Fed) will keep interest rates in the current range of 4.25-4.50% for longer.
After the stubborn inflation report, the probability for the Fed to cut interest rates in the June meeting has eased to almost 35% from 49%, recorded on Tuesday, according to the CME FedWatch tool.
Contrary to market expectations, US President Donald Trump said just before the CPI data release that interest rates “should be lowered”, adding that they would “go hand in hand” with upcoming tariffs.
On Tuesday, Fed Chair Jerome Powell reiterated on the first day of a two-day testimony at Capitol Hill that the central bank is in “no rush to cut interest rates” as the economy is “strong overall”, with a lower unemployment rate and inflation staying well above the 2% target. Powell added, “We know that reducing policy restraint too fast or too much could hinder progress on inflation.”
This week, investors will also focus on the US Producer Price Index (PPI) and the Retail Sales data for January, which will be released on Thursday and Friday, respectively.
