EUR/USD steadies near 1.1870 as weaker US inflation pressures the Dollar
- EUR/USD claws back part of its earlier losses after soft US CPI data weighs on the Greenback.
- Soft US CPI data reinforces expectations for Fed rate cuts later this year.
- Fed-ECB divergence supports EUR/USD, with the European Central Bank seen holding rates steady.
The Euro (EUR) regains some ground against the US Dollar (USD) on Friday, with EUR/USD clawing back part of its earlier losses as soft US Consumer Price Index (CPI) data pressures the Greenback. The pair is trading near 1.1870 at the time of writing, little changed on the day but still heading for small weekly gains.
US inflation came in softer than expected in January. Headline CPI rose 0.2% on the month, below market expectations and easing from December’s 0.3% increase. On a yearly basis, CPI slowed to 2.4% from 2.7%, undershooting forecasts of 2.5%.
Core inflation was more mixed. CPI excluding food and energy rose 0.3% MoM, in line with expectations and up from 0.2% previously, while the annual core rate eased slightly to 2.5% from 2.6%, matching market forecasts.
In reaction to the data, the US Dollar gave up its earlier gains, while Treasury yields extended their decline as easing inflation pressure bolstered expectations of monetary policy easing by the Federal Reserve (Fed).
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 96.91 at the time of writing, pulling back from an intraday high of 97.15.
US rate futures repriced sharply after the CPI report, with markets now pricing in around 61 basis points (bps) of Fed rate cuts in 2026, up from about 58 bps just before the release. According to the CME FedWatch Tool, markets assign around a 50% probability to the first rate cut being delivered in the June-July window.
Meanwhile, the European Central Bank is widely expected to keep rates on hold through 2026, pointing to a growing policy divergence with the Fed and leaving the EUR/USD tilted to the upside. However, the recent appreciation of the Euro could complicate the outlook.
ECB policymaker Martins Kazaks said on Friday that ECB officials are “in monitoring mode on euro strength” and warned earlier this week that a “sizeable and pacey” appreciation could weigh on the inflation outlook and potentially trigger a policy response.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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