EUR/USD forecast: Hawkish Fed repricing should keep dollar in driving seat

• EUR/USD forecast tilts lower as markets absorbs mixed US inflation data
• PPI comes in surprising flat after mixed CPI report on Tuesday
• Euro faces tariffs uncertainty

 

The EUR/USD staged a mild bounce on Tuesday’s morning session after falling relatively sharply along with other FX majors on Monday. The slight recovery was initially likely driven by profit taking on long dollar positions given that the greenback was also weaker against other currencies. We saw a surprising weak PPI report which contributed to the dollar’s small pullback. However, the reaction to the CPI report from yesterday suggests the dollar bulls are starting to assert their control, and we could see more strength in the coming days as investor worries about the impact of higher rates of tariff intensify. Against this backdrop, the EUR/USD forecast remains slightly tilted to the bearish side of things.

 

It remains to be seen whether the latest US inflation figures will support dovish bets on the Federal Reserve. With the market having leaned heavily on the idea of imminent Fed rate cuts, yesterday’s CPI reality check has ushered in a bout of hawkish repricing. Today’s US PPI data however suggests there are still little signs of tariffs-driven inflation, further increasing the pressure on the Fed chair to cut rates.

 

Dollar strength: A correction or a shift in tone?

 

Tuesday saw the greenback post its best session in over a month, climbing to a three-week high following the CPI report. While the core CPI missed expectations by a tenth of a percentage point, the move in FX was more about positioning than print. Markets had gone into the release primed for dovish validation, largely due to external noise and assumptions of political pressure trickling down to the Fed.

 

That didn’t happen. Instead, consumer inflation came in just firm enough to keep the September rate cut debate alive but far from conclusive. With no meaningful deceleration in sight and tariffs potentially feeding through over the coming quarter, expectations for a September cut will now likely need weaker labour data to hold up. The EUR/USD forecast, accordingly, reflects this shift in sentiment.

 

Some of the dollar bounce was undoubtedly driven by squeezed positioning. But what matters now is whether this marks a change in the market’s broader stance on Fed policy. There’s still room for hawkish repricing of U.S. rates, which may well keep the dollar bid in the near term.

 

PPI comes in soft

 

All eyes were therefore on today’s PPI release which was expected to reinforce that hawkish tilt. However instead of surprising to the upside, we had flat monthly readings for both core and headline PPI.

 

On a year over year basis, PPI was 2.3% vs 2.5% expected while core PPI was 2.6% instead of 2.7% eyed.

 

The key question remains: do investors ignore past inflation and continue to expect higher prices once the full impact of tariffs is felt from August 1 onwards, or are they now convinced that inflation is not materialising as much as feared?

 

Looking ahead, traders will be listening closely to comments from Fed officials—Logan, Barkin, Hammack, Bostic, and Williams—before the blackout period begins on 19 July.

 

EUR/USD forecast: Can the euro weather the tariff storm?

 

On the European side, the data calendar was relatively light, though yesterday brought some mildly encouraging numbers. The German ZEW survey rose to 52.7 from 47.5, while Eurozone industrial production surprised to the upside with a 1.7% monthly gain. These figures failed to lend any support to the EUR/USD, as the pair remains largely at the mercy of broader dollar dynamics for now.

 

The risks to the EUR/USD forecast remain tilted towards a drift lower—potentially towards 1.15—if US data continues to outperform or Fed rhetoric turns more assertively hawkish.

 

Beyond data, trade tensions loom large. The EU stands ready to retaliate with tariffs on US goods—think aircraft and spirits—if talks with Washington break down before the August deadline. This could erode confidence in the euro’s resilience.

 

Meanwhile, ECB policymakers are sounding a note of caution. Reports suggest next week’s meeting will include stress-testing more adverse scenarios, likely triggered by the growing unpredictability of US trade policy. Bundesbank President Joachim Nagel struck a measured tone, suggesting September as the appropriate juncture to reassess the rate path, following eight cuts between June 2024 and June 2025.

 

For now, however, the EUR/USD forecast hinges on the dollar side of the equation—and with the market’s dovish assumptions under review, the euro may have a rocky road ahead.

 

Technical EUR/USD forecast: Key levels to watch

 

Source: TradingView.com

 

The recent loss of bullish momentum certainly points to a modestly bearish EUR/USD forecast. The bullish trend line going back to the first quarter broke down yesterday, around the 1.1650-1.1660 area. This is now going to be the most important resistance zone to watch. Further resistance lies around the 1.1700 handle.

 

At the time of writing, the EUR/USD was testing key support around the shaded blue area of between 1.1570ish to 1.1615ish. This area was resistance in April and in mid-June, before rates broke higher later that month.

 

From a technical point of view, the EUR/USD forecast will turn negative if rates were to go below this area in the coming days.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R