EUR/USD extends gains as ceasefire optimism weighs on USD despite firm CPI

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The Euro (EUR) edges higher against the US Dollar (USD) on Friday, with EUR/USD extending gains for a fifth straight day, as improving risk sentiment following the US-Iran ceasefire announcement offsets the impact of firm US inflation data and keeps the Greenback under pressure.

EUR/USD extends gains as ceasefire optimism keeps USD on the back foot despite firm CPI.
US CPI rises in March, driven by higher Oil prices, but core inflation remains contained.
Attention now shifts to the upcoming US-Iran negotiations in Pakistan this weekend.

At the time of writing, EUR/USD trades around 1.1736, its highest level since early March. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 98.55, heading for its biggest weekly decline since January.

The latest US inflation data, the first to fully capture the impact of rising Oil prices since the onset of the US-Iran war, highlighted mounting price pressure. Data released by the US Bureau of Labor Statistics showed the Consumer Price Index (CPI) rose 0.9% MoM in March, accelerating sharply from 0.3% in the previous month. Annual inflation increased to 3.3% YoY from 2.4% in February, with both readings in line with market expectations.

Additionally, the Consumer Price Index excluding Food and Energy rose 0.2% MoM in March, unchanged from the previous month and below expectations of 0.3%. On an annual basis, core CPI edged up to 2.6% YoY from 2.5%, also coming in slightly below the 2.7% forecast.

From a monetary policy perspective, the mixed inflation picture reinforces expectations that the Federal Reserve (Fed) will remain on hold in the near term. While the energy-driven surge in headline CPI highlights upside risks to inflation, the softer core readings suggest underlying price pressures remain contained.

Fed policymakers have repeatedly flagged that progress on disinflation has slowed, while labor market conditions are showing signs of strain. In this context, markets are likely to expect a data-dependent approach, with the Fed needing clearer evidence that inflation is moving sustainably toward its 2% target before considering any rate cuts.

On the geopolitical front, the two-week ceasefire between the US and Iran has eased fears of a major escalation, although the fragile nature of the agreement continues to keep markets cautious, with upcoming negotiations in Pakistan over the weekend in focus.

Any meaningful breakthrough, particularly a full reopening of the Strait of Hormuz, could further weigh on the US Dollar and allow the Euro to extend its recovery. At the same time, a sustained decline in Oil prices would help ease inflation pressures and reduce the need for the Fed to keep interest rates higher for longer.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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