/

Soft CPI weighs on dollar as Fed signals one rate-cut

2411 views
1 min read

The EURUSD corrected to a near round-level figure of 1.0800 in Thursday’s late European trading.

The major currency pair faces pressure after a bullish Wednesday, when it rallied to 1.0850 from an almost six-week low of 1.0720 after the US Consumer Price Index (CPI) data for May was cooler than expected, weighing heavily on the Dollar.

Later on Wednesday, however, EURUSD pared gains after the Federal Reserve’s FOMC monetary policy meeting. The Fed kept interest rates unchanged in the range of 5.25-5.50% for the seventh straight time, as expected, and policymakers projected fewer rate cuts for this year than they expected three months ago.

Specifically, the Fed’s dot plot indicated that policymakers see only one rate cut this year against the three forecasted in March.

Fed officials scaled back the number of rate cuts due to the strong labour market and stubbornly higher inflation in the January-March period. Also, they revised the year-end forecast for the core Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred inflation measure, higher to 2.8% from March’s estimate of 2.6%.

In the press conference, Fed Chair Jerome Powell said the May CPI report is encouraging, but also that policymakers want to see more good data to gain confidence before turning to policy normalisation.

Powell didn’t provide any cues about Fed rate-cut timing and advocated for maintaining the current interest rate framework for a longer period. He added that “unexpected easing” in the labour market could force policymakers to address rate cuts early, but also that the employment outlook appears to be firm.

Before the Fed announcements, the CPI report showed that US inflation cooled in May. On the month, headline inflation steadied, and the core reading grew by 0.2%, less the estimated 0.3%. On the year, headline and core CPI decelerated to 3.3% and 3.4%, respectively.

(Source: OANDA)