The EUR/USD pair rose to 1.0999, its highest level since February 2, before settling at 1.0995, up 0.79% on the day. The US Dollar index (DXY) was down 0.62% on the day, at 101.51.
This surge was due to short covering in EUR that continued into the middle of the week, as the US Dollar weakened significantly on Wednesday, following the release of the US Consumer Price Index (CPI) data for March.
Traders are of the view that the Federal Reserve may halt its rate hikes after the potential increase in May and pivot before the year-end. The CPI rose just 0.1% last month, below economists’ expectations of 0.2%, and down from a 0.4% increase in February.
CPI increased 5.0% in the 12 months through March, the smallest YoY gain since May 2021. It had increased by 6.0% YoY in February. Rental prices remained high, leading to a steady rise in core CPI.
The Federal Open Market Committee (FOMC) meeting minutes and US retail sales data, scheduled for release on Friday, are awaited. The FOMC’s March 21-22 meeting minutes may emphasize hawkish sentiment, given continued elevated inflationary pressures, as indicated by the distribution of the March dot plot for 2023.
TD Securities analysts explained that with banking stress contained, this meeting may highlight the hawkish sentiment.
Ahead of the minutes, Fed funds futures traders are pricing in a 69% probability of a 25 basis point rate hike by the Fed at its May 2-3 meeting, down from around 76% before the CPI data was released.