Euro rises as soft US inflation data sends dollar lower

The euro climbed against the US dollar on Tuesday after a cooler-than-expected US inflation report prompted traders to scale back expectations for further Federal Reserve rate increases, sending the greenback to its lowest level in weeks.

Inflation Undershoots Forecasts

The Bureau of Labor Statistics reported that the Consumer Price Index fell 0.4 percent on a seasonally adjusted basis in June, a sharp reversal from May's 0.5 percent increase. The annual headline rate dropped to 3.5 percent from 4.2 percent in May, undershooting economists' consensus forecast of 3.8 percent. Core inflation, which strips out food and energy, eased to 2.6 percent year-over-year from 2.9 percent, also below the 2.8 percent market estimate, according to Trading Economics.tradingeconomics+3

The data landed well below what markets had priced in, reinforcing the view that the Fed's tightening cycle may be nearing its end. According to Reuters, the dollar index fell 0.33 percent to 100.94, while EUR/USD rose 0.33 percent to around 1.1418. Gold also rallied more than 2 percent as the weaker greenback made dollar-priced assets more attractive to foreign buyers.reuters+1

Fed Rate Bets Repriced

Before the release, CME FedWatch data had shown roughly 30 percent odds of a 25-basis-point hike at the Fed's upcoming meeting. The soft print likely pushed those expectations lower, though Fed Chairman Kevin Warsh's congressional testimony, also scheduled for this week, could reset the narrative depending on his tone.fxleaders+1

The monthly CPI decline was driven largely by a retreat in energy prices, which had surged earlier in the year. The energy index had accounted for over 60 percent of prior monthly increases. Shelter costs continued to rise modestly, gaining 0.3 percent in May before the June cooldown.bls

Broader Market Reaction

Stocks also advanced on the combination of softer inflation and strong bank earnings, according to Reuters. The reaction underscored how sensitive markets remain to inflation readings that could delay or halt additional tightening. The Japanese yen held near 162 per dollar, little changed as intervention concerns lingered.reuters+1

The next major inflation release — July CPI data — is scheduled for August 12.bls