EUR/USD is recovering some of its earlier decline on Wednesday as the US dollar (USD) falls slightly from intraday highs, offering modest support to the euro (EUR) ahead of the Federal Reserve’s (Fed) interest rate decision at 10:00 a.m. 18:00 GMT.
At the time of writing, the pair is trading around 1.1518, after briefly dropping below the 1.1500 level during the European trading session.
Earlier in the day, the dollar found support following reports of an attack on Iran’s South Pars gas field, which added recent stress to already troubled energy markets amid the ongoing U.S.-Israeli conflict with Iran. The latest escalation has heightened concerns about inflation, fueling expectations that the Fed will keep borrowing costs elevated for an extended period of time.
At the same time, stronger than expected data on the producer price index (PPI) in the US confirmed this opinion. The PPI index increased by 0.7% m/m in February, from 0.3% in January and above the forecast of 0.5%, while the annual interest rate accelerated to 3.4% y/y from 2.9%. Core PPI was also better than expected, increasing by 0.5% m/m and 3.9% y/y.
In airy of recent events, US Treasury yields have increased slightly, which has strengthened the US dollar. The US Dollar Index (DXY), which tracks the value of the dollar against a basket of six major currencies, is trading at around 99.77, up 0.22% on the day.
Meanwhile, investors showed a muted reaction to inflation data in the euro zone. The Core Harmonized Index of Consumer Prices (HICP) rose 0.8% m/m, unchanged from January, while the annual base rate remained steady at 2.4%, in line with market expectations.
The headline HICP rose by 0.6% on a monthly basis, just below the 0.7% recorded in January, while the annual rate was unchanged at 1.9%, in line with forecasts.
Attention now shifts to the Fed’s monetary policy announcement, with the central bank widely expected to leave interest rates unchanged at 3.50%-3.75% for a second straight meeting. With this decision largely priced in, investors will focus on Fed Chair Jerome Powell’s future guidance for guidance on the future path of monetary policy.
Concerns about oil-fueled inflation have caused a piercing reevaluation of interest rate cut expectations in recent weeks. Before tensions erupted in the Middle East, markets were pricing in at least two rate cuts in 2026. However, this outlook has since changed and investors now expect rates to remain unchanged for an extended period of time, and will not even fully price in a single 25 basis point cut.
Attention will also focus on the updated Summary of Economic Outlooks (SEP), particularly the scatter chart, to see whether the Fed maintains its earlier forecast of one rate cut in 2026 or changes its stance toward a more restrictive one.
Frequently asked questions about inflation
Inflation measures the escalate in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (m/m) and annual (y/y) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on, and it is the level aimed at by central banks, which are required 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 (m/m) and year-on-year (y/y) basis. Core CPI is the figure that central banks target because it does not include variable spending on food and fuel. When core CPI rises above 2%, it typically 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.
While it may seem counterintuitive, high inflation in a country causes the value of its currency to escalate, and vice versa for lower inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more capital inflows from around the world from investors looking for a lucrative place to put their money.
Historically, gold was the asset that investors turned to in times of high inflation because it held its value, and while investors will often continue to buy gold for its unthreatening haven property in times of extreme market turmoil, in most cases this is not the case. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are bad for gold because they escalate the opportunity cost of holding gold compared to interest-bearing assets or putting your money in a deposit account. On the other hand, lower inflation is usually good for gold because it lowers interest rates, making the brilliant metal a more viable investment alternative.
