The EUR/USD pair advanced to near 1.1425 during early Asian trading hours on Wednesday, driven by a weaker US Dollar following softer-than-expected US inflation data [1]. The US Consumer Price Index (CPI) declined to 3.5% year-over-year in June, down from a three-year high of 4.2% in May, and below market expectations of 3.8% [1]. On a monthly basis, headline CPI dropped by 0.4% in June compared to a 0.5% rise in May. Core CPI, which excludes food and energy, was unchanged month-on-month and rose 2.6% year-over-year, lower than May's 2.9% and the expected 2.8% [1].
The softer inflation data eased pressure on the Federal Reserve, with the probability of a July rate hike falling sharply to 16% from 42% on Monday, according to the CME FedWatch tool. However, the likelihood of a rate increase this year remains robust at 80%, though down from 89% on Monday [1]. Fed Chairman Kevin Warsh cautioned that slowing inflation in June does not mean the Fed's mission is accomplished, while Fed Governor Christopher Waller stated that rates may need to rise "in the near term" if inflation stays well above the central bank's 2% target [1].
In Europe, traders increased bets on faster European Central Bank (ECB) interest-rate hikes after surging oil prices reignited inflation concerns. Markets expect the ECB to raise rates by 25 basis points in September, with another hike by year-end considered almost certain, according to Bloomberg [1].
Market participants are awaiting further cues from the US Producer Price Index (PPI) report, scheduled for release on Wednesday, which could influence future monetary policy decisions [1].
CONCLUSION
Softer US inflation data has boosted the Euro against the US Dollar and reduced the likelihood of a near-term Fed rate hike, though expectations for a rate increase later this year remain high. Meanwhile, rising oil prices have prompted traders to anticipate more aggressive ECB rate hikes. The market is now focused on upcoming US PPI data for further direction.