EUR/USD steadies as strong US PPI data fails to lift Dollar

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EUR/USD steadies on Friday, extending the range-bound price action that has defined trading so far this week. The Euro (EUR) remains relatively firm after the US Dollar (USD) failed to build on stronger-than-expected US Producer Price Index (PPI) data.

EUR/USD steadies above 1.1800 despite stronger-than-expected US PPI data.
US producer inflation remains firm, supporting a higher-for-longer Fed rate stance.
June rate-cut odds fall below 50%, with markets eyeing July for easing.

At the time of writing, the pair is trading around 1.1815, recovering modestly after briefly dipping below the 1.1800 mark earlier in the day.

Data released by the US Bureau of Labor Statistics showed that the headline PPI increased 0.5% MoM in January, exceeding the 0.3% forecast. December’s reading was revised lower to 0.4% from 0.5%.

On an annual basis, PPI rose 2.9%, above the 2.6% expectation, though slightly below the previous 3% print.

Core PPI, which excludes food and energy, climbed 0.8% MoM, sharply higher than the 0.3% estimate. December’s core reading was revised lower to 0.6% from 0.7%. On a yearly basis, core PPI accelerated to 3.6% from 3.3%, topping the 3% forecast.

Following the release, the Greenback briefly edged higher before easing. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 97.64 after retreating from the daily high near 97.85.

The data strengthened the case for the Federal Reserve (Fed) to keep interest rates on hold, as inflationary pressure remains above the 2% target.

Markets are increasingly pricing in no change in interest rates at the Fed’s March and April meetings, with the odds of a June rate cut dropping below 50%, according to the CME FedWatch Tool. The probability of a July rate cut stands at around 68%.

In the Eurozone, softer German inflation data released earlier on Friday triggered only a limited reaction in the Euro. Preliminary figures showed Germany’s Consumer Price Index (CPI) rose 0.2% MoM in February, falling short of the 0.5% forecast but edging up from the previous 0.1% increase. On a yearly basis, CPI eased to 1.9% from 2.1%, missing expectations of 2%.

Meanwhile, the preliminary Harmonized Index of Consumer Prices (HICP) increased 0.4% MoM, slightly below the 0.5% estimate but rebounding from the prior -0.1% reading. The annual HICP rate moderated to 2% from 2.1%

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.