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- EUR/USD claws back part of its earlier losses after soft US CPI data weighs on the Greenback.
- Soft US CPI data reinforces expectations for Fed rate cuts later this year.
- Fed-ECB divergence supports EUR/USD, with the European Central Bank seen holding rates steady.
The Euro (EUR) regains some ground against the US Dollar (USD) on Friday, with EUR/USD clawing back part of its earlier losses as soft US Consumer Price Index (CPI) data pressures the Greenback. The pair is trading near 1.1870 at the time of writing, little changed on the day but still heading for small weekly gains.
US inflation came in softer than expected in January. Headline CPI rose 0.2% on the month, below market expectations and easing from December’s 0.3% increase. On a yearly basis, CPI slowed to 2.4% from 2.7%, undershooting forecasts of 2.5%.
Core inflation was more mixed. CPI excluding food and energy rose 0.3% MoM, in line with expectations and up from 0.2% previously, while the annual core rate eased slightly to 2.5% from 2.6%, matching market forecasts.
In reaction to the data, the US Dollar gave up its earlier gains, while Treasury yields extended their decline as easing inflation pressure bolstered expectations of monetary policy easing by the Federal Reserve (Fed).
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 96.91 at the time of writing, pulling back from an intraday high of 97.15.
US rate futures repriced sharply after the CPI report, with markets now pricing in around 61 basis points (bps) of Fed rate cuts in 2026, up from about 58 bps just before the release. According to the CME FedWatch Tool, markets assign around a 50% probability to the first rate cut being delivered in the June-July window.
Meanwhile, the European Central Bank is widely expected to keep rates on hold through 2026, pointing to a growing policy divergence with the Fed and leaving the EUR/USD tilted to the upside. However, the recent appreciation of the Euro could complicate the outlook.
ECB policymaker Martins Kazaks said on Friday that ECB officials are “in monitoring mode on euro strength” and warned earlier this week that a “sizeable and pacey” appreciation could weigh on the inflation outlook and potentially trigger a policy response.
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