US Inflation Surprise Weighs on EUR/USD | Weekly Forex Forecast

By IFCCI Research & Financial Education Desk
August 2025

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Macro Overview: Hot Inflation Alters Fed Outlook

The EUR/USD exchange rate entered the week under renewed pressure after US inflation data came in hotter than expected. According to the July Consumer Price Index (CPI), core inflation rose 3.1% year-on-year, surpassing consensus forecasts of 2.9%.

This seemingly small miss carries large implications for global markets. For the Federal Reserve, the elevated reading reduces the likelihood of a September rate cut, pushing market expectations further into December. For the European Central Bank (ECB), the challenge is different: weak growth and constrained monetary tools leave little room to respond.

As a result, EUR/USD slipped towards the 1.0850–1.0900 support zone, reflecting the policy divergence narrative that continues to define the pair.

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Federal Reserve Policy: Inflation vs. Market Expectations

The Fed has consistently signaled a data-dependent approach. Chair Jerome Powell emphasized in recent speeches that inflation must convincingly return to target before easing policy.

• Before the CPI release: markets priced a 60% chance of a September cut.
• After the release: odds dropped below 25%, with December now the base case.

Elevated US real yields further enhance the dollar’s attractiveness, keeping the greenback structurally supported.

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ECB Outlook: Trapped by Weak Growth

While the Fed wrestles with inflation, the ECB faces stagnation. Eurozone GDP expanded just 0.3% QoQ in Q2 2025, with consumer confidence hovering at multi-year lows. Credit conditions remain tight, and lending surveys show little improvement.

The ECB’s room for maneuver is limited:

• Headline inflation has moderated closer to target.
• Growth remains fragile, leaving policymakers cautious.
• Any premature tightening risks a deeper downturn.

This policy asymmetry leaves the euro structurally weaker, especially against a resurgent US dollar.

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Global Risk Sentiment: Dollar as Safe Haven

Beyond monetary policy, global risk sentiment continues to favor the US dollar:

• Geopolitical risks: tensions in Eastern Europe persist.
• Energy supply uncertainty: natural gas prices remain volatile.
• Capital flows: investors rotate towards US Treasuries and USD assets.

Historically, the USD strengthens in periods of uncertainty, further weighing on EUR/USD.

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Technical Analysis: EUR/USD Faces Key Test

From a chart perspective, EUR/USD is approaching a critical inflection point.

• Support Levels:
  • 1.0850 → 50-day moving average (DMA)
  • 1.0780 → 200-DMA
  • 1.0700 → June lows
• Resistance Levels:
  • 1.0940 → 21-DMA
  • 1.1000 → psychological round number
  • 1.1085 → July swing high

The Relative Strength Index (RSI) remains below 50, indicating bearish momentum. Unless the pair breaks above 1.1000 decisively, the path of least resistance remains downward.

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Investor Positioning & Sentiment

Data from the CFTC Commitments of Traders (COT) report reveals a sharp reduction in speculative euro long positions, highlighting growing caution.

Meanwhile, IFCCI’s retail trader sentiment survey shows 61% of traders remain net-long EUR/USD, often a contrarian bearish signal. Institutional desks continue to highlight that real yield differentials strongly favor the USD over the euro.

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Tactical Trading Strategies

Short-Term (1–2 Weeks)

• Sell EUR/USD rallies near 1.0940–1.1000.
• Place stop-loss above 1.1085 to limit risk.
• Downside targets: 1.0780, then 1.0700.

Medium-Term (1–3 Months)

• Maintain a neutral-to-bearish bias until US inflation eases.
• Diversify into gold and USD assets as defensive hedges.
• Watch ECB’s September meeting for potential policy guidance.

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Implications for Asian & Emerging Market Investors

For investors in Malaysia, Singapore, and other Asia-Pacific economies, a stronger dollar has direct consequences:

1. Import Costs Rise → commodity-dependent economies face higher USD pricing.
2. Export Competitiveness → exporters invoicing in USD may benefit temporarily.
3. FX Volatility → leveraged forex positions require stronger risk controls.

Advisors under the IFCCI Financial Trading Diploma stress the importance of hedging FX exposure and portfolio diversification during macro uncertainty.

🔗 Authority Links:

• CFA Institute – Currency Risk Analysis
• FCA UK – Forex Trading Regulations
• IFCCI – Certified Financial Consultant Programs

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Conclusion: Dollar Retains the Upper Hand

The weekly EUR/USD outlook remains tilted in favor of the US dollar. Hot inflation data has undermined near-term rate cut expectations, while the ECB remains constrained by sluggish growth. This policy divergence is unlikely to fade soon.