Title: EUR/USD Drops as Hot US PPI Data Quells Expectations for Aggressive Fed Rate Cuts
Source: Original article by Christian Borjon Valencia, FXStreet
Link: https://www.fxstreet.com/news/eur-usd-dives-as-scorching-us-ppi-kills-hopes-for-jumbo-fed-cut-202508142013
The EUR/USD currency pair extended its decline following the release of surprisingly strong US Producer Price Index (PPI) data. The hotter-than-expected inflation figures weakened the case for a substantial interest-rate cut by the Federal Reserve in the near term, leading to a strengthening of the US dollar against the euro. As market participants digested the latest economic data, they adjusted their Federal Reserve rate expectations, resulting in notable pressure on the euro and causing a swift retreat from recent highs.
Recent Market Environment
The financial markets have been heavily influenced by speculation surrounding the Federal Reserve’s monetary policy outlook in light of moderating inflation and evolving economic conditions. In previous weeks, investors had ramped up bets on up to two interest-rate cuts from the Fed by year-end, including the possibility of an aggressive 50 basis-point (bps) move. However, the latest inflation data has thrown cold water on these expectations.
The EUR/USD currency pair initially traded higher at the start of the week but reversed sharply after the release of the PPI report. The dollar surged across the board as traders repriced the likelihood of rate adjustments from the Federal Open Market Committee (FOMC).
Key Takeaways from the US PPI Report
– The US Producer Price Index for final demand rose 0.5% month-over-month in April, surpassing economists’ prediction of a 0.3% rise.
– On an annual basis, the PPI climbed 2.2%, higher than the projected 2.1% and a notable acceleration from the prior month’s 1.8%.
– The core PPI, which excludes food and energy, advanced by 0.5% monthly and 2.4% year-over-year. Both figures exceeded consensus forecasts.
– Services prices were a significant contributor to the upside surprise, reflecting resilience in business activity despite higher borrowing costs.
Importance of PPI Report in Policy Considerations
PPI serves as a leading indicator of inflation, reflecting price changes in the production pipeline before they reach consumers. A higher-than-expected PPI suggests that businesses are facing increased input costs, which may eventually be passed on to consumers and feed into the Consumer Price Index (CPI).
Although the Federal Reserve focuses more on Personal Consumption Expenditures (PCE) as its primary inflation gauge, PPI is closely watched for signs of broader pricing pressure. The latest PPI numbers put to rest the notion that inflation has been swiftly curbed and challenge the view that monetary policy easing is imminent.
Shift in Market Expectations for Fed Cuts
– Prior to the PPI release, Fed Funds Futures priced in approximately 50 basis points of rate cuts in 2024.
– Following the data, the probability of aggressive easing significantly diminished as yield-sensitive instruments began to reflect a higher-for-longer scenario.
– Futures contracts now suggest that the Fed might wait until late Q3 or Q4 before considering a more modest rate reduction, likely revisiting the idea during the Jackson Hole symposium or September FOMC meeting.
Federal Reserve Commentary and Market Response
Commentary from Federal Reserve officials in recent weeks has leaned more hawkish amid persistent inflation data. Several Fed speakers have emphasized the importance of maintaining current rates until inflation shows clearer signs of retreating towards the 2% target.
Notably:
– Fed Chair Jerome Powell previously indicated that while disinflationary trends are underway, more progress needs to be made before substantial cuts can be safely enacted.
– Other Fed members, including Governor Michelle Bowman and San Francisco Fed President Mary Daly, noted that the Fed may need to hold rates higher for longer to ensure inflation is durably on track.
This shift
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