Euro Strengthens Against the Dollar Amidst Inflation Concerns

The EUR/USD pair is trading around 1.0710 in the early Asian trading hours on Monday, gaining ground against the USD. The softer US Dollar below the 106.00 mark is providing support to the major pair. This comes as the US PCE inflation rose by 2.7% YoY in March, compared to 2.5% prior, exceeding expectations. The recent US inflation data has altered expectations of when the Federal Reserve (Fed) will start cutting interest rates. According to the CME FedWatch tool, the likelihood of a rate cut by the July meeting has decreased from 50% to 25%, with traders pricing in a nearly 60% chance of a rate cut at the September meeting.

On the other hand, the European Central Bank (ECB) has highlighted cooler inflation in the Eurozone, signaling a possible interest rate cut before the Fed. ECB President Christine Lagarde hinted at a potential lowering of the deposit rate from a record-high of 4% in June. The first reading of the German Consumer Price Index for April is set to be released on Monday, adding further insight into Eurozone inflation trends. With all eyes on the Federal Reserve monetary policy meeting on Wednesday, the market will be closely watching for any new developments regarding interest rates.

Impact of Inflation Figures

The US Bureau of Economic Analysis reported on Friday that the Personal Consumption Expenditures (PCE) Price Index rose by 2.7% YoY in March, higher than the previous reading of 2.5%. The Core PCE figure, which is the Fed’s preferred inflation measure, remained steady at 2.8% YoY in March, exceeding expectations. Both headline PCE and the core PCE Price Index rose by 0.3% in March on a monthly basis. These inflation figures are likely to influence the Fed’s decision-making process regarding interest rates in the coming months.

While the weaker US Dollar is currently supporting the EUR/USD pair, the market remains cautious about the Fed’s stance on interest rates. The possibility of a rate cut by the Fed in September could potentially lift the Greenback and limit the upside potential of the Euro against the Dollar. Traders will continue to monitor economic data releases and central bank statements for further clues about the future direction of the EUR/USD pair.