Euro steadies as markets digest US inflation data and await ECB decision

• Euro gains ground as the US Dollar eases after the latest US inflation report.
• Markets look past higher annual CPI and focus on softer monthly core inflation.
• Traders await ECB's monetary policy decision due on Thursday, with a 25-basis-point rate hike fully priced in.

The Euro (EUR) holds modest gains against the US Dollar (USD) on Wednesday as the Greenback comes under modest pressure following the release of US inflation data. At the time of writing, EUR/USD trades around 1.15548, up 0.15% on the day.

Headline Consumer Price Index (CPI) eased to 0.5% MoM in May from 0.6% in April. Core CPI slowed to 0.2% from 0.4%, falling short of market expectations of 0.3%.

However, on a yearly basis, CPI accelerated to 4.2% from 3.8%, its highest level since April 2023, while core inflation edged up to 2.9% from 2.8%. Both readings matched market expectations.

The data suggests underlying inflation remained relatively stable, while the rise in headline inflation was largely driven by higher energy prices.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 99.85, consolidating minor losses as the data did little to alter recent hawkish repricing of Federal Reserve (Fed) interest-rate expectations.

Meanwhile, resilient US economic growth and a stabilizing labor market support the view that the Fed can keep interest rates unchanged for longer, with traders increasingly pricing in a rate hike by year-end.

At the same time, ongoing tensions in the Middle East continue to underpin safe-haven demand for the US Dollar. US President Donald Trump warned in a Truth Social post that Iran had "taken too long to negotiate a deal that would have been great for them" and that Tehran would now "have to pay the price."

Attention now turns to the European Central Bank (ECB) policy decision on Thursday. Markets have fully priced in a 25-basis-point rate hike.

Traders will closely watch ECB President Christine Lagarde's post-meeting press conference for clues on whether more rate hikes could follow and how policymakers plan to balance rising inflation with slowing economic growth amid higher energy costs.