The euro (EUR) recovered some of its value against the US dollar (USD) on Friday, with the EUR/USD pair bouncing back from earlier declines as weaker US Consumer Price Index (CPI) data impacted the dollar. As of this writing, the currency pair was around 1.1870, showing little change for the day, but still on track for a slight weekly gain.
US inflation figures were softer than anticipated in January. The headline CPI increased by 0.2% last month, falling short of market predictions and slowing down from December’s 0.3% rise. On a year-over-year basis, the CPI growth rate decelerated to 2.4% from 2.7%, which was also lower than the expected 2.5%.
Core inflation presented a mixed picture. When excluding food and energy, the CPI rose 0.3% month-over-month, aligning with expectations and up from the previous 0.2%. However, on an annual basis, core rates dipped slightly from 2.6% to 2.5%, matching market forecasts.
This data led the US dollar to relinquish some of its earlier gains, while Treasury yields extended their decline, as easing inflation concerns raised expectations for a potential monetary policy shift by the Federal Reserve.
The US Dollar Index (DXY), which measures the dollar’s value against a basket of six major currencies, was trading at approximately 96.91 at this point, down from an intraday high of 97.15.
Following the CPI report, futures linked to US interest rates surged, with the market now estimating about 61 basis points (bps) for the Fed’s rate cut by 2026, an increase from around 58 bps just before the report was released. The CME FedWatch tool suggests there’s about a 65% probability that the first rate cut could occur in the June-July timeframe.
Conversely, the European Central Bank is largely expected to keep interest rates steady until 2026. Observers have noted that the policy divergence between the Fed and the ECB is widening, which might give the EUR/USD pair an upward tilt. However, the recent strength of the euro could complicate this outlook.
ECB policymaker Martins Kazaks mentioned on Friday that officials were “monitoring the strength of the euro,” having warned earlier this week that rapid euro appreciation could negatively affect inflation projections and potentially elicit a policy response.
