Rate Cuts Pushed Back as Fed Battles Inflation

The US saw hotter inflation than expected, while Fed Chair Jerome Powell reiterated a more hawkish stance after the last meeting, suggesting that rate cuts may emerge later than previously forecast.

Defying Gravity

On Wednesday, the US Bureau of Labour Statistics (BLS) reported an acceleration in inflation, contrary to market expectations of a slight decline. The headline rose to 3% from 2.9%, defying projections of staying unchanged. However, the core rate, which excludes volatile elements like food and energy and is closely monitored by the Fed, increased to 3.3% from 3.2% and an expected drop to 3.1%. The primary contributor was an unexpected surge in used car prices, marking the strongest increase in several months, coupled with persistently high shelter costs, as rent and housing expenses in the US have remained notably "sticky."

Fed Chair Jerome Powell completed his biannual testimony before the House following the inflation data release. He stuck to the general rhetoric observed after the latest FOMC meeting, emphasising that inflation has not yet reached the preferred level. His comments took on a new intensity in light of the latest inflation figures. He said that interest rates had already been reduced by 100 basis points, and further cuts would have to wait until inflation or the labour market improves. His remarks came on the heels of the latest NFP figures, which showed rising wages and lower unemployment, which signalled a tightening market.

The Market Reaction

In response to Powell's Testimony and the hotter inflation print, markets pared back expectations of rate cuts this year. The next rate cut, previously priced in for June, has now been delayed to September, while the previously expected second rate cut has been completely removed from the table. The dollar initially strengthened but then wobbled as the basket of currencies used for comparison experienced movements of their own. Yields on US Treasuries still traded higher, with a notable steepening of the yield curve reflecting expectations of challenges ahead for the Fed in lowering rates while introducing the risk of a potential interest rate hike.

The EURUSD initially lost ground in the immediate aftermath of the data release but quickly reversed to trade higher by the end of the day as geopolitical factors took centre stage. US President Donald Trump said he held separate phone calls with Ukrainian President Volodymyr Zelenskiy and Russian President Vladimir Putin, with the latter two expressing a desire to reach a peace deal. The euro rallied to its best levels since February 5th after Trump announced the initiation of negotiations to resolve the conflict in Ukraine. Separately, China announced its support for mediating a deal between the two countries, including providing peacekeeping forces.

EURUSD C&H Signals Upside

EURUSD encountered resistance at 1.0444 after completing a potential bullish cup and handle (C&H) pattern, signalling a measured move towards the 1.06 handle. If the pair breaks past the neckline of the pattern, resistance lies at 1.0458 and 1.0533. However, a rejection at the peak could form a double top, potentially opening the door to 1.0352 and the 1.31 swing. On the downside, a break below 1.028 would expose the 1.02 round support.

Source: SpreadEx / EURUSD

Key Takeaways

The CPI beat expectations, prompting a delay in the Fed rate cut timeline as the Chair reiterated his hawkish stance during his testimony. The buck initially rose post-CPI but later faltered amid geopolitics surrounding a potential ceasefire deal between Russia and Ukraine. The combination of hotter inflation, a more hawkish Fed, and geopolitics fueled volatility, with the EURUSD emerging as a beneficiary.