EUR/USD Dips on Stronger US CPI Data, ECB Meeting Looms

The EUR/USD pair saw a significant decline of a full percentage point in the upper 1.0700s following the release of US Consumer Price Index (CPI) data on Wednesday. The warmer-than-expected inflation figures for March reduced the likelihood of an early interest-rate cut by the US Federal Reserve (Fed).

The robust US inflation data bolstered expectations of prolonged higher interest rates in the US, attracting greater inflows of foreign capital and providing a boost to the US Dollar (USD). Consequently, EUR/USD experienced a bearish trend, reflecting the diminished buying power of a single Euro in Dollar terms.

Data from the US Bureau of Labor Statistics revealed a year-on-year increase in prices by 3.5% in March, surpassing the estimated 3.4% rise and the previous month’s 3.2% increase. Additionally, CPI for core goods, excluding volatile food and energy prices, rose by 3.8% year-on-year, exceeding expectations and maintaining the previous month’s rate. Both inflation metrics recorded a 0.4% monthly increase in March, surpassing the estimated 0.3%.

The sustained higher-than-forecast inflation levels have kept price pressures well above the Federal Reserve’s 2.0% target, diminishing the likelihood of an interest-rate cut in June as previously predicted.

In contrast to the Fed’s stance, the European Central Bank (ECB) is perceived as more inclined to implement earlier interest-rate cuts amid subdued growth and inflation expectations in the Eurozone. The anticipation of higher interest rates in the US compared to the Eurozone contributes to the bearish outlook for EUR/USD, as relatively higher interest rates attract foreign capital inflows, favoring the US Dollar.

EUR/USD could witness further volatility on Thursday following the ECB’s April policy meeting. While some ECB members have hinted at a possible interest-rate cut in April, the majority view it as premature due to the absence of the latest wage data, which is considered crucial for inflation models and decision-making processes. Nonetheless, language in the accompanying statement suggesting a higher probability of an interest-rate cut in June could impact EUR/USD movement. Investors remain attentive to developments from both central banks for insights into future monetary policy directions and their implications for currency markets.

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