EUR/USD Steadies as Cooling Inflation Cuts Fed Hike Odds to 35%

Cooling US inflation readings cut the market-implied probability of a September Fed rate hike to 34.8 percent, leaving EUR/USD rangebound as traders reassess the policy path.

"US PPI inflation, an indicator of pipeline cost pressures, came in cooler than consensus forecasts. Following yesterday's CPI release, today's figures are further cooling market expectations for a September Fed rate hike, bringing the implied probability down to around one-third," Mohamed El-Erian, chief economic advisor at Allianz, said.

July headline CPI rose 0.1 percent month over month and 3.4 percent year over year, matching forecasts and easing from 3.5 percent in June. Core CPI, excluding food and energy, increased 0.2 percent monthly and 2.5 percent annually. The producer price index was flat in July, missing expectations for a 0.2 percent gain, with annual wholesale inflation slowing to 4.7 percent from 5.5 percent — the first flat monthly reading since June 2025, according to The Kobeissi Letter. The 10-year Treasury yield eased to about 4.65 percent, while gold traded near $4,384 an ounce.

The shift in rate expectations matters for the euro-dollar pair because the interest-rate differential between the US and the eurozone remains the dominant driver of EUR/USD. With the Fed now seen holding rates at its September meeting and the European Central Bank indicating a cautious approach to policy normalization, the pair is likely to stay rangebound until the next major event — July retail sales due later today and the Fed's policy meeting.

Rate Differentials Keep EUR/USD Rangebound

The muted reaction in EUR/USD reflects a market already positioned for a patient Fed. CME FedWatch data showed the probability of a rate hike in September fell to 34.8 percent from 55 percent a week earlier, a swing that followed two consecutive inflation prints pointing to easing price pressures. The last time producer prices were flat on a monthly basis was June 2025, a period that preceded a prolonged Fed hold and a dollar index that traded sideways for several months.

For the euro, the calculus is complicated by the ECB's own inflation dynamics. While US price pressures are cooling, eurozone inflation remains above the ECB's 2 percent target, keeping the central bank cautious about the pace of policy normalization. That divergence — a Fed on hold and an ECB monitoring its own inflation — leaves the rate differential between the two economies broadly stable, a key reason EUR/USD has failed to break out of its recent range.

Retail Sales and the Fed Meeting Loom

The next test for the dollar comes later today with July retail sales data, which will offer fresh signals on the strength of US consumer spending. A stronger-than-expected reading could revive concerns that inflation remains too persistent, while a weak print would reinforce the case for a Fed hold. The Fed's September policy meeting, scheduled for mid-September, remains the key event for the pair, with markets now pricing a roughly two-thirds probability of a hold.

The cooling inflation narrative has also supported risk assets, with the S&P 500 closing at a record high of 7,798.99, up 0.65 percent, while the Nasdaq Composite gained 0.81 percent to 26,803.02. Lower Treasury yields reduce borrowing costs and lift the present value of future earnings, a dynamic that has helped equities even as the dollar holds steady. In Asia, the AI-driven rally lifted South Korea's Kospi more than 3 percent for a second consecutive day, while Hong Kong-listed Lenovo shares surged 19 percent after record revenue.

For traders, the low-volatility environment offers a predictable backdrop for hedging, but the calm may be temporary. Any deviation from expected data or central bank commentary could quickly alter the market, and the elevated geopolitical backdrop — with tensions in the Middle East that have kept Brent crude below $88 a barrel — adds a layer of uncertainty that could spill into currency markets. A softer retail sales print would reinforce the case for a Fed pause and could push EUR/USD toward the upper end of its range, while a strong reading would likely revive dollar bids.

This article is for informational purposes only and does not constitute investment advice.