Euro sinks below 1.07

EUR/USD trades back below 1.0700 on Friday as traders digest the implications of the March core Personal Consumption Expenditures Price Index (PCE), the US Federal Reserve’s (Fed) preferred gauge of inflation.

The pair popped higher immediately after the report was released but then broke substantially lower, falling back below the key 1.0700 handle, after core PCE data showed a higher-than-expected reading of 2.8% YoY, when analysts had expected 2.6% from 2.8% previously, according to the US Bureau of Economic Analysis (BEA). On month, Core PCE rose 0.3% in line with expectations and the same as previously.

Following the release, the probability of the Federal Reserve making an interest-rate cut in September from 59% on Friday morning prior to the event to 60% after.

Other data in the PCE report showed headline Personal Consumption Expenditures Price Index rising to 2.7%, beating estimates of 2.6% and a prior reading of 2.5%. On month, the PCE rose 0.3% as expected and the same as previous.

EUR/USD declined sharply to a low of 1.0678 on Thursday following the release of US first-quarter GDP data. Although annualized GDP growth missed consensus expectations and fell below the previous quarter’s growth rate, the Personal Consumption Expenditures Prices component, which measures the change in prices of goods, came in way higher compared with previous quarter and supported the US Dollar (USD).

The inflationary data meant that markets dialed back their expectation of when the Federal Reserve (Fed) will start cutting interest rates, with the chance of a rate cut by the July meeting falling from 50% on the previous day to 34% afterwards, according to analysts at Deutsche Bank.

The expectation of interest rates staying higher for longer temporarily strengthened the Greenback – but weighed on EUR/USD – because higher interest rates attract more foreign capital inflows.