EUR/USD falls as hot US inflation data boosts Fed higher-for-longer expectations

• EUR/USD falls as hotter-than-expected US inflation data boosts the US Dollar and Treasury yields.
• Traders increase bets that the Federal Reserve could keep interest rates higher for longer.
• Rising energy costs fuel ECB tightening expectations, though growth concerns continue to weigh on the Euro.

The Euro (EUR) trades under pressure against the US Dollar (USD) on Tuesday as hotter-than-expected US inflation data strengthens the Greenback and pushes US Treasury yields higher. At the time of writing, EUR/USD is trading around 1.1743, down roughly 0.35% on the day.

Data released by the Bureau of Labor Statistics showed the headline Consumer Price Index (CPI) rose 0.6% MoM in April after increasing 0.9% in March, matching market expectations. On an annual basis, inflation accelerated to 3.8% from 3.3% previously, above forecasts of 3.7%.

Meanwhile, core CPI, which excludes volatile food and energy prices, rose 0.4% MoM, up from 0.2% in March and above expectations of 0.3%. Annual core inflation climbed to 2.8% from 2.6%, also exceeding forecasts of 2.7%.

US inflation accelerated for a second consecutive month in April, largely driven by higher energy prices as Oil remained elevated amid disruptions around the Strait of Hormuz.

The stronger-than-expected inflation data, combined with last week’s upbeat Nonfarm Payrolls (NFP) report, reinforced expectations that the Federal Reserve (Fed) could keep interest rates higher for longer.

According to the CME FedWatch Tool, traders currently expect the Fed to keep interest rates unchanged in the coming months, while also increasing bets on a possible rate hike later this year. The probability of a rate hike at the September meeting currently stands near 13.5%, rising to around 32% for the December meeting.

Rising hawkish Fed expectations and ongoing uncertainty surrounding US-Iran negotiations are helping the US Dollar rebound from recent lows. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.37, up roughly 0.35% on the day.

In the Eurozone, traders are pricing in at least two rate hikes from the European Central Bank (ECB) this year as rising energy prices continue to fuel inflation risks. However, the Eurozone’s heavy exposure to higher energy costs is also fueling concerns about slower economic growth, which could limit the ECB’s ability to tighten policy aggressively.