EUR/USD sinks towards 1.1600 as US inflation rises and crushes Fed cut hopes

• EUR/USD drops as US CPI beats forecasts, reinforcing the Fed’s stance to keep rates steady.

• Trump pushes for rate cuts, threatens more tariffs, seals Indonesia trade deal.

• Germany’s ZEW sentiment jumps to 52.7, the highest since February 2022.

The EUR/USD fell some 0.55% on Tuesday after the latest US inflation report revealed that prices are edging higher, justifying the Federal Reserve's current policy stance. Hence, traders trimmed bets that the Fed would cut rates at the July meeting. At the time of writing, the pair trades at 1.1599, having reached a high of 1.1694.

The Consumer Price Index (CPI) in June exceeded estimates in headline and core figures. Aside from this, the US President Donald Trump demanded that the Fed reduce interest rates, revealed a trade agreement with Indonesia, and threatened to impose additional tariffs on Russia.

Boston Fed President Susan Collins said that she’s in no rush to cut rates, as the data suggests that duties will drive up prices.

Across the pond, the European Union (EU) economic docket revealed that Germany’s ZEW Economic Sentiment Index improved to 52.7, above estimates of 50.4 and up from June’s 47.5 reading, the highest level since February 2022.

Daily digest market movers: EUR/USD on the backfoot on uncertainty about an EU-US deal

The latest US inflation data showed the Consumer Price Index (CPI) rose 2.7% year-over-year in June, matching market expectations. Core CPI came in at 2.9%, just below the 3.0% forecast but still notably above the Federal Reserve’s 2% target. After the data, money markets reduced bets that the Fed will cut rates at the July meeting, with traders eyeing 43 bps of easing.

Consequently, money markets had priced in less than 50 basis points (bps) of easing, with investors pricing in over 43 bps of rate cuts toward the end of the year.

US President Donald Trump unveiled a new trade agreement with Indonesia, under which Indonesian goods will face a 19% duty, while US exports will be exempt from tariffs. He added that similar deals are in the works, and that “Indonesia has committed to purchasing $15 Billion Dollars in U.S. Energy, $4.5 Billion Dollars in American Agricultural Products, and 50 Boeing Jets, many of them 777’s.”

The Wall Street Journal reported that the EU plans retaliatory tariffs for US goods if a trade deal is not reached. They targeted aircraft and alcohol. The EU Trade Commissioner Sefcovic will speak with USTR Jamie Greer “this early evening.”

Trump’s letter to the EU triggered the alarms on the European Central Bank (ECB), which is set to paint a more negative scenario next week than previously thought in June. However, traders seem convinced that the ECB will hold rates unchanged at the next meeting.

ECB's Joachim Nagel said a steady hand is needed on ECB rates, according to Handelsblatt.

Euro technical outlook: EUR/USD clears 20-day SMA, further downside eyed

After clearing the 20-day Simple Moving Average (SMA) of 1.1679, the EUR/USD remains neutral to bearish biased, with sellers eyeing further losses. Momentum is bearish as depicted by the Relative Strength Index (RSI) but has turned flat. This indicates that consolidation lies ahead.

If EUR/USD drops below 1.1600, the next support would be the 50-day SMA at 1.1481. Once surpassed, the next stop would be the 1.1400 figure, followed by the 100-day SMA at 1.1254. On the flip side, if the pair climbs past the 20-day SMA, expect a move toward 1.1700, followed by the July 20 daily high at 1.1749, ahead of 1.1800 and the recent high of 1.1829.