Selling EURUSD on fears of stronger US inflation

The EURUSD outlook has recently been tied to sudden changes in monetary expectations, which, in turn, depend on key US inflation data. What did the latest publication say? The August report is likely to shift the balance of power in the dollar’s favor, pushing the euro out of its long-lasting consolidation.

A macroeconomic release from the US Department of Labor pointed to an acceleration in the Consumer Price Index. The headline CPI came in at 3.4% year-over-year, in line with analysts’ consensus forecast. This inflation spike was largely driven by the energy sector—gasoline costs surged by 27.4% on an annual basis, while Brent crude consolidated above $100 per barrel—with spillover effects across other segments.

The Federal Reserve (Fed) was particularly concerned about the core CPI reading, which excludes volatile food and energy components, as it accelerated to 0.3% month-over-month. This served as a clear signal that US inflation is becoming entrenched and showing no signs of easing.

The money market’s response was swift. According to the CME FedWatch tool, the probability of a Fed rate hike at its September 15–16 meeting skyrocketed to nearly 90% after the inflation release. By comparison, investors had estimated the likelihood of this scenario at around 70% before the publication. Traders are now practically convinced that the tightening cycle is back, pricing in a 25-basis-point increase in the coming days. As a result, 10-year Treasury yields have rushed toward 4.95%, providing a powerful boost to the dollar index (DXY).

Now, let’s turn to the single currency. At the September 10 meeting, the European Central Bank (ECB) raised its deposit rate by 0.25% to 2.50%, in line with expectations. The region’s economy looks quite resilient to external shocks. However, elevated inflation remains its key weakness, with the Harmonized Index of Consumer Prices (HICP) sitting at 3.3%, fueled by the high cost of imported goods.

The euro’s main problem is that market participants view the recent ECB’s hike as the last move before a pause, which may last until next spring. The Fed, now chaired by Kevin Warsh, appears to be at the beginning of the next tightening cycle, potentially widening the rate gap between the two central banks in favor of the dollar.

The overall recommendation is to sell EURUSD. Profits should be taken at 1.1530. Stop Loss could be set at 1.1645.

The volume of the open position should be calculated so that the potential loss (protected by a Stop Loss order) does not exceed 1% of your deposit. If your account balance does not allow opening a position of this size, it is better to avoid entering the market on this signal and wait for other trade options that meet low-risk criteria.