EUR/USD recovers part of its earlier decline on Wednesday as the US Dollar (USD) eases slightly from daily highs, offering modest support to the Euro (EUR) ahead of the Federal Reserve’s (Fed) interest rate decision at 18:00 GMT.
At the time of writing, the pair is trading around 1.1518 after briefly slipping below the 1.1500 mark during the European trading session.
Earlier in the day, the Greenback found support after reports of an attack on Iran’s South Pars gas field, adding fresh stress to already rattled energy markets amid the ongoing US and Israeli conflict with Iran. The latest escalation has intensified inflation concerns, fueling expectations that the Fed will keep borrowing costs elevated for longer.
At the same time, stronger-than-expected US Producer Price Index (PPI) data reinforced that view. Headline PPI rose 0.7% MoM in February, up from 0.3% in January and above the 0.5% forecast, while the annual rate accelerated to 3.4% YoY from 2.9%. Core PPI also beat expectations, increasing 0.5% MoM and 3.9% YoY.
In light of the latest developments, US Treasury yields edged higher, underpinning the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.77, up 0.22% on the day.
Meanwhile, traders showed a muted reaction to the Eurozone inflation data. The Core Harmonized Index of Consumer Prices (HICP) rose 0.8% MoM, unchanged from January, while the annual core rate held steady at 2.4%, in line with market expectations.
The headline HICP increased by 0.6% on a monthly basis, slightly below the 0.7% recorded in January, while the yearly rate remained unchanged at 1.9%, matching forecasts.
Attention now shifts to the Fed’s monetary policy announcement, with the central bank widely expected to keep interest rates unchanged at 3.50%-3.75% for a second consecutive meeting. With the decision largely priced in, traders will focus on Fed Chair Jerome Powell’s forward guidance for clues on the future path of monetary policy.
Concerns over Oil-driven inflation have prompted a sharp repricing of rate-cut expectations in recent weeks. Before Middle East tensions erupted, markets were pricing in at least two rate cuts in 2026. However, that outlook has since shifted, with traders now expecting rates to remain on hold for longer and not even fully pricing in a single 25 bps cut.
Focus will also turn to the updated Summary of Economic Projections (SEP), particularly the dot plot, to see whether the Fed maintains its earlier projection of one rate cut in 2026 or shifts toward a more restrictive stance.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
