Dollar recovers after Fed rate-cut bets fade

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The EURUSD pair fell to 1.0830 in Wednesday’s European trading after failing to recapture a two-month high near 1.0900 on Tuesday.

The major currency pair is retracing as the market sentiment turns cautious ahead of the Eurozone preliminary Consumer Price Index data for May and the US core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published on Friday.

The Eurozone CPI and US core PCE inflation data will significantly influence market speculation for interest rate cuts by the European Central Bank and the Federal Reserve.

On Tuesday, ECB governing council member and Dutch central bank chief Klaas Knot advised adopting a gradual rate-cut approach and making decisions on interest rates based on quarterly economic projections.

Knot highlighted that March projections suggested three or four rate cuts would be appropriate this year. However, recent data showed that wage growth has elevated and the Manufacturing PMI has improved, which undermines the projected rate-cut path based on March data.

The Fed’s preferred inflation measure is estimated to have grown steadily on a monthly and annual basis at 0.3% and 2.8%, respectively.

The Dollar’s DXY Index, which tracks the greenback’s value against six major currencies, saw a sharp recovery to 104.80, prompted by dismal market sentiment.

Investors are turning risk-averse after traders pared Fed rate cut bets for the September meeting as officials have been guiding to keep interest rates at their current levels until they see significant progress in the disinflation process.

Currently, investors expect the Fed to start reducing interest rates from the last quarter of the year.

(Source: OANDA)