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EUR/USD flat, even as Fed officials send hints of multiple rate hikes

ForexMay 17, 2016 05:53PM ET
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EUR/USD fell by 0.01% on Tuesday but still closed above 1.13

Investing.com -- EUR/USD was virtually flat on Tuesday, as investors digested hawkish signals from the Federal Reserve on the increased likelihood of multiple interest rate hikes from the U.S. central bank this year despite the release of subdued core inflation figures earlier in the session.

The currency pair traded in a tight range between 1.1302 and 1.1347, before settling at 1.1314, down 0.0001 or 0.01% on the session. The euro has closed lower against the dollar in three of the last four sessions and nine of the last 11. Though the euro is only up modestly against the dollar over the last month, it still remains up by more than 4% against its American counterpart since the start of 2016. Incredibly, EUR/USD is only down 0.0003 from its level 52 weeks ago.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1713, the high from Aug. 24.

On Tuesday morning, the U.S. Department of Labor's Bureau of Labor Statistics (BLS) said its Consumer Price Index (CPI) rose by 0.4% in April, slightly above consensus forecasts of a 0.3% rise. Consumer prices accelerated last month after a modest 0.1% gain in March. A surge in gasoline prices by nearly 10% drove the gains, as April CPI rose by 1.1% on a yearly basis, up from 0.9% a month earlier. As a result the Core CPI Index, which strips out volatile food and energy prices, rose by 0.2% in line with consensus estimates. On an annual basis, the core index is up by 2.1% in comparison with its reading from April, 2015. It represents a slight decline from March when core prices increased by 2.2% on a yearly basis.

By comparison, the Core PCE Index inched down to 1.6% two months ago. The Core PCE Index, which also discounts food and energy prices, is the Fed's preferred gauge of inflation. As the Fed looks for signs that persistently sluggish inflation is firming, the reading has remained below its targeted goal of 2% in every month over the last three years.

The Federal Open Market Committee (FOMC) has left its benchmark Federal Funds Rate at a targeted range of 0.25-0.50% in each of its first three meetings this year. After implementing its first rate hike in seven years in mid-December, the FOMC said in a closely-watched forecast that it could raise short-term interest rates as much as four times this year. Since then, the FOMC has lowered its outlook to two, amid heightened volatility in global financial markets. Currently, there is a 7.5% chance the FOMC will raise rates by 25 basis points, according to the CME Group's (NASDAQ:CME) FedWatch tool, when it meets next on June 14-15. There is also a 37% chance the FOMC will wait until September before lifting rates, up from 28.8% last month.

The dollar also received only a slight boost from hawkish comments by a pair of Fed policymakers on Tuesday, regarding the increased possibility that the FOMC could raise short-term rates multiple times before the start of 2017. At a joint appearance in Washington, both Atlanta Fed president Dennis Lockhart and San Francisco Fed president John Williams suggested that "two to three rate hikes," seem possible, while Lockhart noted that a rate hike will still remain on the table at the FOMC's next meeting. Neither Lockhart, nor Williams own a vote in the current policy cycle.

Any rate hikes by the FOMC this year are viewed as bullish for the dollar, as foreign investors pile into the greenback in order to capitalize on higher yields.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell by more than 0.15% to an intraday low of 94.31, before closing at 94.55. The index has crashed by more than 4% since early-December.

EUR/USD flat, even as Fed officials send hints of multiple rate hikes
 

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