EUR/USD rebounds after mixed US CPI; Fed rate cut bets hold firm

The Euro (EUR) edges higher against the US Dollar (USD) on Tuesday, snapping a two-day losing streak after mixed US inflation data for July showed headline figures that matched expectations and came in slightly below forecasts on the annual measure, while core inflation surprised to the upside on both monthly and annual readings.

Despite the firmer core print, traders still largely expect the Federal Reserve (Fed) to cut interest rates in September, as easing price pressures and a cooling labor market are seen giving policymakers room to resume lowering borrowing costs.

At the time of writing, EUR/USD is trading near 1.1640, reversing earlier losses that came on the back of deteriorating Eurozone economic sentiment. Meanwhile, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is hovering just above its two-week low around 98.30.

Data from the US Bureau of Labor Statistics showed headline Consumer Price Index (CPI) rose 0.2% MoM in July, matching expectations and slowing from June’s 0.3% gain. On an annual basis, consumer prices held steady at 2.7%, slightly below forecasts of 2.8%. In contrast, Core CPI — which excludes volatile food and energy prices — increased 0.3% MoM, above the expected 0.2% forecast and June’s 0.2% rise. The annual core reading climbed to 3.1% from 3.0%, also exceeding market estimates.

The combination of softer headline inflation and hotter core readings paints a mixed picture for the Fed. While the broader price trend remains anchored, persistent underlying pressures could prompt policymakers to proceed cautiously, even as markets largely price in a September rate cut.

On the European side, sentiment remains fragile after the German ZEW Economic Sentiment Index dropped sharply to 34.7 in August from 52.7 in July, missing forecasts of 40.0. The Eurozone-wide reading also fell to 25.1 from 36.1. The current conditions gauge for Germany also worsened sharply, underscoring persistent growth headwinds in the bloc’s largest economy.

The soft survey data has reinforced expectations that the European Central Bank (ECB) will remain in a wait-and-see mode for the rest of the year, even as inflation in the euro area holds near the 2% target.

Adding to the euro’s support, ECB Governing Council member Joachim Nagel said on Tuesday that interest rates in the euro area are “at a very good level” and that the central bank can react flexibly if needed. He noted that inflation is “no longer a major challenge,” although uncertainty from recent tariff developments has eased but not been fully removed.