The tailwinds from the stock market rally, falling Treasury yields, and the prospect of Fed rate cuts failed to push EUR/USD quotes significantly higher. The pair rose only modestly following the release of the PPI data. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The EUR/USD reacted differently to the CPI and PPI reports.
- The dollar is becoming increasingly sensitive to oil prices.
- Brent remains range-bound between $80 and $90 per barrel.
- The 1.154 level is the line in the sand for the EUR/USD.
Weekly Fundamental Forecast for Dollar
Following the release of the US CPI and PPI data for July, the futures market raised the probability that the federal funds rate will remain unchanged through 2026 to 32%, up from just 11% a month earlier. However, the EUR/USD pair has gained less than 1% over the same period, largely due to higher oil prices. Geopolitics is becoming the dominant driving force in the Forex market.
This is reflected in the US dollar’s markedly different reactions to the two inflation reports. While the slowdown in consumer price growth from 3.5% to 3.4% strengthened the greenback, the decline in annual producer price growth from 5.5% to 4.7% in July weakened the dollar. Yet in both cases, stock indices rose, Treasury yields fell, and expectations of Fed tightening declined.
US Producer Price Inflation
Source: Bloomberg.
The key difference was oil. When the CPI data was released, oil prices were rising; by contrast, the PPI report came as Brent prices were falling. The US estimated traffic through the Strait of Hormuz at 9 million bpd and said the US Navy’s ability to ensure tanker safety was improving. At the same time, US Treasury Secretary Scott Bessent announced the most extensive sanctions ever imposed on Iran. In theory, this could encourage Tehran to return to the negotiating table.
Absent a significant escalation or de-escalation of the conflict, Brent is likely to remain range-bound between $80 and $90 per barrel. That is still well above the $70–75 range seen around the turn of June and July, which underpinned the recent slowdown in inflation. Investors should avoid reading too much into the CPI and PPI figures from recent months. If the futures market is wrong and inflation accelerates alongside oil prices, the probability of further monetary tightening could rise sharply. That would give EUR/USD bears an opportunity to recoup their losses.
Market Expectations for Fed Policy Rate Trajectory
Source: Bloomberg.
However, the outlook remains mixed. The methodology used to calculate inflation is scheduled for revision in September, which could result in a significant slowdown in price growth. In other words, the elevated August figures could prove to be nothing more than a temporary peak, after which the disinflationary trend may resume.
Given the trends in Brent crude and US consumer prices, the EUR/USD is more likely to consolidate than establish a clear upward or downward trend. For now, it makes sense to identify the boundaries of the trading range, which appears to be 1.147–1.160.
Weekly Trading Plan for EUR/USD
The 1.154 level is emerging as a key dividing line: a move above it would favor long positions in the EUR/USD, while a break below it would strengthen the case for selling. That said—and it is worth emphasizing again—the goal here is not to catch a trend. For now, the priority is to identify and trade within the consolidation range.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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