EUR/USD Forecast: Euro retreats from highs with US Inflation in focus

EUR/USD retreats to the 1.1650 area after rejection near 1.1700.
Concerns about the Fed's independence are weighing on the US Dollar
Investors are bracing for a strong US CPI reading later on Tuesday.

Guillermo Alcala FXStreet

EUR/USD recovery was capped at the 1.1700 area on Monday, and the pair retreated to the mid-range of the 1.1600s, as bullish comments by the New York Federal Reserve’s (Fed) President John Williams eased market concerns about the central bank’s independence.

Williams said on Monday that interest rates have moved “the modestly restrictive stance closer to neutral” and that he expects a healthy economy in 2026. Williams also stated that he sees monetary policy well-positioned to support the stabilisation of the labour market, curbing hopes of interest rate cuts in the coming months.

Investors sold the US Dollar across the board on Monday’s early trading, after the New York Times reported that the US Government was initiating a criminal investigation against the Fed Chairman, Jerome Powell.

The action marks an escalation in an extended conflict between Trump and Powell, which puts the central bank’s independence into question and threatens the status of the US Dollar as a reserve currency. Fitch Ratings earned on Monday that the Fed’s autonomy is a key reason supporting the US economy’s AA++ credit rating.

Later on Tuesday, the focus will shift to the US Consumer Prices Index (CPI) report, which is expected to show that price pressures remain elevated above the Fed’s 2% target and that core inflation ticked up in December. Barring surprises and given the recent strong US macroeconomic data, these figures are likely to support the idea of very gradual Fed easing ahead.

Technical Analysis:

EUR/USD trades at 1.1659 at the time of writing, pulling back from the top of the descending channel, in the 1.1700 area. Technical indicators are mixed. The Moving Average Convergence Divergence (MACD) line remains above zero, but the histogram is contracting, which highlights a waning upside momentum. The Relative Strength Index (RSI) has pulled back below 50, showing a neutral-to-bearish stance.

The pair might find some support at the channel's midline, now at 1.1650. ahead of Friday's low of 1.1618 and the channel's bottom, now at the 1.1600 area. To the upside, trendline resistance is now at 1.1694, a few pips below Monday's high. A confirmation above here clears the path towards the January 6 high, at the 1.1740 area.

(The technical analysis of this story was written with the help of an AI tool.)

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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