Euro heading to 12 month high

The Euro is closing in on a 12 month high against the greenback after U.S. producer prices unexpectedly fell in March, boosting expectations that the Federal Reserve is nearing the end of its rate hiking cycle.

The producer price index (PPI) for final demand dropped 0.5% last month. In the 12 months through March, the PPI increased 2.7%. That was the smallest year-on-year rise since January 2021 and followed a 4.9% advance in February.

It comes after consumer price index (CPI) inflation data on Wednesday came in at 5% year-on-year in March, down from 6% in February. Core inflation - which strips out volatile food and energy prices - picked up to 5.6%, from 5.5% the previous month.

“We are headed back to a low inflation world, that’s the message of the market right now," said Adam Button, chief currency analyst at ForexLive in Toronto. "The next big trade is that the inflation scare is over."

The Euro was further boosted by the release of CPI figures from |Germany which hit the market at 1.1 percent on a monthly basis and 7.4 percent year on year means the European Central bank will continue their rate hiking program for the foreseeable future.

The main driver of the EUR/USD currency pair for the rest of the day will be the latest retail sales report from the US and this may well be the final piece of news which dictates what the Fed will do with interest rates next month.

The forecasts are already quite grim as retail sales are projected to have fallen by 0.4% for the second straight month. However, the downbeat expectations make an upside surprise more likely so there is a danger that traders with long positions in the Euro may get caught off guard as the US dollar jumps as a rate hike next month is once again put back on the table.