The euro strengthened above $1.14 against the US dollar on Wednesday after unexpectedly weak US inflation data reduced expectations that the Federal Reserve would raise interest rates in July. The single currency traded near $1.1433 in early Asian dealings, extending its advance from the previous session.
Market Snapshot
The euro (EUR/USD) rose about 0.1% to $1.1433, after gaining 0.38% on Tuesday and closing near $1.1424. The move took the currency pair further above the psychologically important $1.1400 level.
The US Dollar Index (DXY), which measures the currency against six major peers, slipped to 100.81. It had fallen 0.35% in the previous session, its largest decline in nearly two weeks, after retreating from its highest level since 2 July.
US Treasury yields also declined as investors reduced bets on tighter monetary policy. The two-year yield moved nine basis points below a 16-month high following the inflation report.
Inflation Undershoots Forecasts
The US Consumer Price Index fell 0.4% in June after rising 0.5% in May, the Bureau of Labor Statistics said on Tuesday. It was the largest monthly decline since April 2020. Annual inflation slowed to 3.5% from 4.2% in May, below market expectations of about 3.8%.
Core consumer prices, which exclude food and energy, were unchanged from May and rose 2.6% from a year earlier. That compared with annual core inflation of 2.9% in May and expectations for a 2.8% increase.
Lower energy costs drove much of the decline. The energy index dropped 5.7% during June, while petrol prices fell 9.7%. Shelter costs increased just 0.1%, their smallest monthly rise since January 2021.
Fed Expectations Shift
Interest-rate futures showed the probability of a Fed increase in July falling to 16%, from 42% on Monday. Markets still assigned an 80% chance of at least one increase before the end of 2026, reflecting continued uncertainty over inflation and energy prices.
“The sizeable downside surprise gives the Fed greater scope to remain on hold for longer,” said Sim Moh Siong, foreign-exchange strategist at OCBC, in Wednesday commentary.
Fed Chair Kevin Warsh nevertheless maintained a cautious position during testimony to the House Financial Services Committee. He said policymakers had no tolerance for persistently elevated inflation and remained committed to restoring price stability. The Fed held its target rate at 3.50% to 3.75% at its June meeting.
Oil Clouds Inflation Outlook
The dollar’s decline was limited by renewed concern that higher oil prices could reverse part of June’s improvement in consumer inflation. Crude prices remained near one-month highs as fighting between the United States and Iran disrupted traffic around the Strait of Hormuz.
“The broader inflation outlook remains uncertain despite the softer CPI report,” said Uto Shinohara, senior investment strategist at Mesirow Currency Management. He cited persistent inflation and renewed energy-related risks.
A prolonged rise in oil and transport costs could increase prices for fuel, manufactured goods and imported products. That would complicate the Fed’s policy decisions and could revive demand for the dollar if traders again expect US rates to remain elevated.
ECB Policy Supports Euro
The euro has also drawn support from expectations that the European Central Bank will continue tightening policy. The ECB raised its three key interest rates by 25 basis points on 11 June, taking the deposit rate to 2.25%, after concluding that the Middle East conflict was generating additional inflation pressure.
The central bank expects eurozone inflation to average 3.0% in 2026 before easing to 2.3% in 2027 and 2.0% in 2028. It has said future decisions will depend on incoming data and the duration of the energy shock.
Markets are pricing another 25-basis-point ECB increase in September, with an additional move expected by year-end, according to pricing cited on Wednesday. A widening shift in expectations between the Fed and ECB could provide further support for EUR/USD.
Outlook
Traders will next assess Wednesday’s US Producer Price Index for signs that lower consumer inflation is also appearing earlier in the supply chain. Further comments from Fed officials will be watched for guidance on the July policy decision.
Currency markets will also monitor oil prices and developments around the Strait of Hormuz. A sustained energy-price increase could restore US inflation concerns and support the dollar, while further soft economic data could allow the euro to extend its advance above $1.14.
