Euro steady, eyes on inflation data

EUR/USD posts a fresh weekly high at 1.0880 in Tuesday’s American session. The major currency pair strengthens amid soft US Dollar (USD) and deepening uncertainty over the pace at which the European Central Bank (ECB) will reduce key borrowing rates after the June meeting. 

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, extends its decline to 104.40. The US Dollar is facing the heat even though investors’ expectations for the Federal Reserve (Fed) reducing interest rates from the September meeting have faded significantly. The CME FedWatch tool shows that the probability of the Fed maintaining the current policy framework in September has increased to 50% compared with the roughly 35% seen a week before. 

The strong United States (US) economic outlook and policymakers’ hawkish guidance on interest rates have forced traders to pare rate bets. In the European session, Minneapolis Fed Bank President Neel Kashkari said the central bank should wait for significant progress in inflation before lowering interest rates. Kashkari added that room for more rate hikes remains open if inflation fails to come down. 

This week, the market speculation for Fed rate cuts will be guided by the core Personal Consumption Expenditure price index (PCE) data for April, which will be published on Friday. The core PCE inflation data, which is the Fed’s preferred inflation measure, is estimated to have remained steady on a monthly and annual basis.