After a fresh batch of US data, traders revised their rate expectations. The divergence stems from mixed inflation readings. The core PCE price index, the Fed's preferred price gauge, rose 0.2% month-on-month versus a 0.3% median forecast, according to the Bureau of Economic Analysis. Headline PCE inflation increased 0.3% m/m, matching consensus. On a year-over-year basis, core inflation held at 3.0% (vs. 3.3% expected) for the third consecutive month, while headline PCE inflation stands at 3.4%, well above the Fed's 2% target for more than five years.

Traders reacted by cutting the probability of an October rate hike to roughly 36%. This change did not happen in a vacuum: on Tuesday, New York Fed President John Williams said another rate adjustment higher could be appropriate later this year to rein in inflation. Remember, the Fed raised rates earlier this month for the first time since 2023, and since then, every strong data release has reinforced the market's view that the tightening cycle may continue.

That softer-than-expected core PCE price index allowed markets to breathe easier, given the focus on inflation. Yet traders remain cautious because uncertainty about upcoming US labor market releases persists.

So why are many investors still positioned for further Fed hikes? Because the second tranche of data was decidedly stronger: real consumer spending posted its strongest uptick since March 2025; the private sector added 90,000 jobs, marking the best three-month run; and Q2 GDP was revised up from 1.5% to 2.2% annualized. Add surging oil, which directly feeds longer-term inflation expectations and term premia, and you get upward pressure on the long end of the curve. Stronger economic prints keep the yield curve steep and long-term rates a touch higher.

Note that expensive long-term funding itself tightens financial conditions — mortgages and corporate borrowing costs are anchored to 30-year yields. In one sense, that helps the Fed by delivering some anti-inflationary pressure without additional committee action. In another, persistently high long yields signal the market's skepticism about a return to 2% inflation, a message the Fed cannot easily ignore.

In my view, this two-speed dynamic is likely to persist at least through Friday. If the jobs report confirms labor market strength — roughly 90,000 jobs added — the odds of an October hike would likely rebound to 40% or higher, and the 30-year yield could consolidate above 5.6%.

EUR/USD technical outlook

Buyers should consider how to capture 1.1346. Only that would open a test of 1.1379. From there, a move to 1.1410 is possible, but doing so without backing from major players will be difficult. On the downside, I'd expect significant buyer interest only around 1.1312. If bids are absent there, it would be prudent to wait for a new low at 1.1284 or to open long positions from 1.1249.

GBP/USD technical outlook

Pound buyers need to overcome the immediate resistance level of 1.3270 to target 1.3307. Breaking above that mark will be challenging, with 1.3341 as the next extended target. On the downside, bears will try to seize control at 1.3238. A break below that level would hit bulls hard and could push GBP/USD to 1.3206 with scope to test 1.3173.