**US CPI Comes in Lower Than Expected, Lifting EUR/USD Pair**
*By XTB Market Analysis Team*
The latest U.S. Consumer Price Index (CPI) report has raised investor expectations that the Federal Reserve may soon consider easing monetary policy. With inflation data coming in softer than anticipated, financial markets responded swiftly across various asset classes. Notably, the EUR/USD currency pair gained momentum following the news, signaling a shift in market sentiment surrounding the U.S. dollar. Here’s a detailed breakdown of the CPI report, its implications for interest rates, and the broader impact on forex markets.
**June CPI Breakdown**
The U.S. Bureau of Labor Statistics released the June Consumer Price Index report, showing weaker inflation than forecasted. This data has significant implications for monetary policy.
Key takeaways from the CPI report include:
– **Headline CPI** (YoY): Rose 3.0%, falling below the expected 3.1% and significantly lower than May’s 3.3%.
– **Core CPI** (YoY, excludes food and energy): Increased by 3.3%, down from the previous reading of 3.4%.
– **Headline CPI** (MoM): Declined by 0.1% against market expectations of no change (0.0%). This marked the first monthly decline in CPI since May 2020.
– **Core CPI** (MoM): Increased by 0.1%, slightly softer than the 0.2% estimate.
This was the first monthly drop in headline inflation in over four years, highlighting progress toward the Federal Reserve’s inflation target of 2 percent. Markets interpreted this data as a signal that inflationary pressures are receding in a sustained manner, opening the door for potential interest rate cuts in the near term.
**Market Reaction**
The release of the CPI report led to an immediate and sharp market reaction. Investors repriced expectations for monetary policy, with ripple effects seen across FX markets, equities, and treasuries.
### EUR/USD Currency Pair
– The EUR/USD pair surged following the CPI data, gaining approximately 50 pips immediately after the announcement.
– The euro pushed higher against a weakening dollar, signaling a shift in rate expectations and capital flows.
– The pair broke above the resistance level around 1.0835, reaching as high as 1.0890 before consolidating.
The move suggests investor sentiment is leaning toward a scenario where the European Central Bank (ECB) holds steady or tightens policy further, while the Fed may start to pivot dovishly.
### U.S. Dollar Index (DXY)
– The DXY saw a sharp drop as traders adjusted their expectations for future rate hikes. After the data release, the dollar index fell into intraday lows below 104.50.
– The retreat in the dollar contributed to gains in other major currencies including the euro, pound, and yen.
– Lower yields on U.S. Treasury bonds further weighed on the greenback.
### Equity Markets
– U.S. equity indices rallied sharply after the inflation data.
– The S&P 500 and Nasdaq Composite both reached fresh all-time highs, driven by increasing confidence that the Fed might lower interest rates without fearing an inflation resurgence.
– Technology and interest rate-sensitive sectors outperformed.
### Treasury Yields
– U.S. bond yields tumbled across the curve, as traders bet on a more dovish Fed stance.
– The benchmark 10-year Treasury yield dropped below 4.20%, after trading above 4.30% earlier in the session.
– The 2-year yield, which is more sensitive to interest rate changes, fell below 4.40% — a significant drop reflecting a sharp shift in expectations.
**Shifting Federal Reserve Expectations**
The softer CPI report has led investors and analysts to reconsider the likelihood and timing of Federal Reserve interest rate cuts.
Before the CPI release:
– Markets were pricing in roughly one 25 basis point rate cut in 202
Read more on EUR/USD trading.