Forex Market: EUR/USD not far from 3-week peak as investors bet on Fed skip

EUR/USD traded not far from recent three-week peak, as surprisingly soft US CPI inflation report reinforced prospects that the Federal Reserve would probably abstain from raising interest rates later on Wednesday.

US consumer price inflation slowed down to 4% in May, or the lowest annual level since March 2021, data by the Bureau of Labor Statistics showed. The lower CPI reading was driven by a drop in energy prices.

Additionally, US core CPI inflation, which does not take into account volatile items such as food and energy, decelerated to 5.3% in May, or the lowest annual level since November 2021.

After the soft CPI data, investors trimmed their bets for a 25 basis point hike by the Fed at the conclusion of its policy meeting today, with the chance of such a move now being lesser than 6%.

“The soft inflation report effectively cements a Fed pause, although I doubt it will be enough to warrant a dovish undertone as it’s not in their interest with CPI twice the Fed’s target,” Matt Simpson, senior market analyst at City Index, was quoted as saying by Reuters.

“Whilst it was enough to send EUR/USD above 1.0800, it wasn’t enough to keep it there given a hawkish pause seems quite likely.”

Meanwhile, the European Central Bank is widely anticipated to deliver a 25 basis point rate hike at its policy meeting tomorrow to address persistently high inflation.

As of 8:36 GMT on Wednesday EUR/USD was inching up 0.04% to trade at 1.0797. Yesterday the major Forex pair went up as high as 1.0823. The latter has been the pair’s strongest level since May 22nd (1.0831).