• US CPI at 3.1% YoY with Core CPI at 3.9% contradicts softer inflation expectations.
• Futures tilt towards later Fed easing, with consensus for unchanged rates in May.
• US Treasury yield surge, reaching new highs since November, due to adjusted rate forecasts.
• ZEW Economic Sentiment Index exceeds forecasts, indicating optimism for ECB and Fed policy shifts.

The EUR/USD tumbled from around daily highs at 1.0796 following a red-hot inflation report in the United States (US) that pushed back expectations of Federal Reserve interest rate cuts, as seen by futures market data. At the time of writing, the pair exchanged hands at 1.0715.

US CPI pushed back interest rate cuts by the US central bank

The US Department of Labor revealed that inflation ticked slightly above expectations, catching traders off guard. Headline inflation, as measured by the Consumer Price Index (CPI) for January, came at 3.1% YoY, lower than December’s data but above the 2.9% expected. Core CPI was unchanged at 3.9%, up from a 3.7% dip estimate on annual figures.

After the data, traders pushed back the first Fed rate cut to June, with traders seeing a 62% chance of keeping the federal funds rate at the 5.25%-5.50% range in May. US Treasury bond yields edged up, with 2s hitting 4.633%, its highest level since November 28, and the 10-year at 4.297%.

In the meantime, during the European session, the ZEW Economic Sentiment Index exceeded estimates and the previous reading data. ZEW President Achim Wambach commented, “Over two-thirds of respondents expect the European Central Bank to make interest rate cuts in the coming six months, and nearly three-quarters are anticipating imminent rate cuts by the US central bank