The decline in oil prices and Treasury yields, combined with a rebound in stock indices, appears to be supporting the euro. However, the latest inflation data points to the need for more aggressive Fed action, potentially changing the entire market outlook. Let’s take a closer look at the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US inflation continues to accelerate.
- The Fed may raise rates by 50 basis points at once.
- The market is expecting three rounds of rate hikes.
- Short positions can be opened if the EUR/USD pair drops below 1.1135.
Weekly Fundamental Forecast for US Dollar
Don’t fight the Fed. Investors had been looking to commodity, equity, and bond markets for clues about the EUR/USD pair’s direction. However, the October US inflation report settled the debate. Consumer prices rose by 0.4%, while core inflation increased by 0.3% month over month, with both figures exceeding expectations. The hotter-than-expected data sent Treasury yields surging at their fastest pace in 19 months, giving the US dollar fresh momentum.
US Inflation Change
Source: Wall Street Journal.
In the absence of an official 12-month rate, The Wall Street Journal estimated that headline CPI accelerated from 3.7% to 4%, while core inflation climbed from 2.6% to 2.8%. Meanwhile, the core PCE price index, the Fed’s preferred inflation gauge, rose to 3.3% year over year, its highest level since November 2023. The trend increasingly resembles the inflationary surge of 2022, when consumer prices soared above 9%, strengthening the case for decisive action by the Fed.
It is becoming increasingly difficult to argue that interest rates should not have been raised in October, as some FOMC members had advocated. This also raises questions about Kevin Warsh’s position. He has attempted to justify the central bank’s inaction with economic arguments, but political considerations may also have played a role. The Fed chair may have been reluctant to upset Donald Trump ahead of the midterm elections.
However, dwelling on what might have happened is a futile exercise. Markets must deal with the realities of the present, and those realities leave the Fed with two potential courses of action. It could deliver a 50-basis-point rate hike in December, as FOMC member Christopher Waller suggested before the latest inflation figures were released. Alternatively, it could raise rates at two consecutive meetings, in December and January.
Expected Extent of Fed’s Monetary Tightening
Source: Bloomberg.
Investors are no longer ruling out either scenario. Before the inflation report was released, derivatives markets priced in an 84% probability of a 25-basis-point rate hike in December and a 16% chance that borrowing costs would remain unchanged. Following the hotter-than-expected CPI figures, the probability of a 25-basis-point increase climbed to 86%, while the no-change scenario gave way to a 50-basis-point hike, which is now assigned a 14% probability.
More importantly, derivatives markets are now pricing in not two, but three rounds of monetary tightening. This creates additional downside risks for the EUR/USD. Investors are increasingly anticipating a prolonged Fed tightening cycle rather than a simple return to the interest-rate levels that prevailed before borrowing costs began to decline in August 2025. The federal funds rate could eventually move above 4.5%. For the US dollar, this represents a significant bullish catalyst.
Weekly Trading Plan for EUR/USD
The stronger-than-expected US inflation data for October created an opportunity to open short positions on the EUR/USD following a break below the 1.1210 support level. A further decline below the previous swing low of 1.1135 would provide an additional bearish signal and a potential opportunity to increase short positions.
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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