It would seem that a slowdown in inflation—and the resulting decline in the likelihood of Fed tightening—combined with falling Treasury yields and a rally in the S&P 500, should have sent the greenback tumbling. Yet that has not happened. Why? Let’s take a closer look and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- US inflation continues to slow.
- The likelihood of a Fed rate hike in 2026 is declining.
- The US dollar is becoming increasingly sensitive to oil prices.
- Short positions on the EUR/USD opened at 1.1565 can be maintained.
Weekly Fundamental Forecast for Dollar
Sometimes, taking no action is the best course of action. The slowdown in inflation has given the Fed some breathing room. The market now expects interest rates to remain at their current level and has reduced the probability of a rate hike in September from 50% to 40%. Stock indices have risen, while Treasury yields have fallen. The EUR/USD pair responded exactly as expected—the rally toward 1.1565 allowed traders to add to short positions.
US Inflation
Source: Wall Street Journal.
The biggest surprise in the report was the lack of surprises. Consumer prices and core inflation came in exactly as expected, both on a monthly and annual basis. CPI readings are moving further away from May’s highs, which gives FOMC doves more room to voice unconventional views. Why raise rates if doing so would not address the factors that caused inflation to accelerate? Tightening monetary policy will not end the conflict in the Middle East, nor will it persuade the US administration to roll back tariffs.
The futures market has abandoned expectations of two rounds of monetary tightening in 2026 but continues to price in the possibility of one. It is not difficult to understand investors’ reasoning. One of the factors behind the slowdown in inflation in June and July was the decline in gasoline prices. However, Brent crude has risen again in August amid the escalation of the conflict in the Middle East, putting renewed upward pressure on petroleum product prices.
Market Expectations for Fed Interest Rate
Source: Bloomberg.
Despite Donald Trump’s bold claims that the US controls the Strait of Hormuz, the sharp decline in traffic through the strait—from 130 tankers before the war to just 14—suggests otherwise. This is particularly telling given that 11 of those 14 vessels chose the route designated by Iran. The White House is shifting from airstrikes toward economic blockade measures, but Tehran has lived under sanctions for years. The longer the world’s main oil supply route remains closed, the greater the risk that Brent will rise above $100 per barrel and inflation will accelerate.
This is precisely the scenario that commodity and currency markets are beginning to price in. As a result, the US dollar is regaining ground after its temporary weakness following the employment and inflation reports. Moreover, the broad reinstatement of tariffs on S&P 500 companies is providing a tailwind not only for the stock market but also for the US economy. The resurgence of American exceptionalism is supporting the greenback. According to the Wall Street Journal, 40 firms have reported refunds totaling $9.6 billion in import duties, while the Customs Agency has received applications worth a total of $128.7 billion.
Weekly Trading Plan for EUR/USD
The Fed’s passivity—at least through October—allows investors to shift their focus toward geopolitics. Brent is becoming a key driver of the EUR/USD pair. For now, it makes sense to keep short positions formed at 1.1565 open.
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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