Fed shrugs off early rate cuts

EUR/USD remains below the round-level figure of 1.0800 in Thursday’s New York session. The major currency pair falls as the US Dollar (USD) remains firm even though the United States (US) Producer Price Index (PPI) and Consumer Price Index (CPI) report for May turned out softer than expected. The report shows that the monthly core PPI was unchanged, and the headline figures declined by 0.2%, while investors anticipated them to rise. Annual headline PPI surprisingly decelerated to 2.2%, while economists forecasted the data to grow strongly by 2.5% from the April release of 2.3%, upwardly revised from 2.2%. The core PPI declined to 2.3% from the estimates and the prior release of 2.4%. 

Generally, producers reduce the prices of goods and services at their premises when they expect or experience a soft demand environment. This has boosted expectations of a cooling inflation outlook. However, the US Dollar (USD) holds strength as the Federal Reserve's (Fed) hawkish guidance outweighs softening inflation prospects. The US Dollar Index (DXY) holds intraday gains near a crucial resistance of 105.00. 

On Wednesday, the Fed kept interest rates unchanged in the range of 5.25%- 5.50% for the seventh straight time, as expected. Policymakers projected fewer rate cuts for this year than they expected three months ago. 

Specifically, the Fed’s dot plot indicated that policymakers see only one rate cut this year against the three forecasted in March. Fed officials scaled back the number of rate cuts due to the strong labor market and stubbornly higher inflation in the January-March period. Also, they revised the year-end forecast for the core Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred inflation measure, higher to 2.8% from March’s estimate of 2.6%. 

In the press conference, Fed Chair Jerome Powell said the May’s CPI report is encouraging but also that policymakers want to see more good data to gain confidence before turning to policy normalization. Fed Powell didn’t provide any cues about Fed rate-cut timing and advocated for maintaining the current interest rate framework for a longer period. Powell added that “unexpected easing” in the labor market could force policymakers to address rate cuts early, but also that the employment outlook appears to be firm.