EUR/USD comes under pressure as an appeal for risk-sensitive assets weakens due to hawkish guidance on interest rates by Federal Reserve (Fed) policymakers, who continue to argue in favor of maintaining the current interest rate framework as they want to see a decline in inflation for months before considering rate cuts. The United States inflation declined more than expected in May, however, officials expect that a one-time decline in price pressures will be insufficient to make rate cuts appropriate.
On Tuesday, Fed Governor Michelle Bowman delivered hawkish guidance on interest rates. Bowman said they are not at a point where rate cuts become appropriate. She pushed back expectations of rate cuts to 2025 and warned of more hikes if disinflation appears to stall or reverse.
Contrary to the Fed’s hawkish outlook on interest rates, investors expect two rate cuts this year, and the policy-easing process will begin in the September meeting. For more cues on the interest rate outlook, investors await the core Personal Consumption Expenditures Price Index (PCE) data for May, which will be published on Friday.
According to the estimates, the PCE inflation report will show that price pressures grew at a slower pace of 0.1% month-on-month from the prior release of 0.2%. Annually, the underlying inflation is expected to rise modestly by 2.6% from 2.8% in April. Soft inflation data would boost expectations of the Fed reducing interest rates in September, while hotter-than-expected figures would weaken them
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