EUR/USD was little changed, while the Dollar Index edged higher, ahead of the US CPI release for January. The data is being watched after a delay linked to the partial government shutdown.
US economists at Deutsche Bank forecast monthly headline CPI of +0.26% in January, down from +0.31% in December. They expect motor fuel prices to fall by -2.4%, which could weigh on the headline rate.
Inflation Data Watch
Core Inflation Outlook
The same forecast expects core CPI to be firmer at +0.35% month on month. Markets have adjusted expectations for US interest rate cuts after recent weaker US data.
Pricing for the December meeting implied 53bps of cuts, up +5.3bps on the day. The article notes that markets continue to price further easing under a new Fed Chair.
With EUR/USD quiet, our attention is fixed on the next US CPI release and what it means for the Federal Reserve. The market is currently pricing in approximately 50 basis points of rate cuts by the end of this year, but conviction is weak. A surprise in the inflation data could easily shift that outlook and create a significant move in the currency pair.
We saw a similar situation in early 2025, when a delayed January CPI report caused significant debate. At that time, headline inflation was soft due to falling energy prices, but the core reading was much stronger, causing confusion about the Fed’s path. This historical parallel reminds us to scrutinize the details of the upcoming report beyond the main number.
Market Volatility Outlook
Options Strategy Considerations
This uncertainty suggests that implied volatility in EUR/USD options for the coming weeks may be underpriced. Buying volatility through instruments like straddles could be a prudent strategy, positioning to profit from a large price swing regardless of the direction. The current tight trading range often precedes a breakout, and the inflation data is the most likely catalyst.
Our view is reinforced by recent economic figures from late 2025 and early 2026, which paint a mixed picture. While GDP growth slowed to 1.5% in the fourth quarter of 2025, the January jobs report showed a resilient labor market, adding 180,000 jobs. This conflicting data keeps the Federal Reserve in a data-dependent mode and fuels market indecision.
For traders anticipating a specific outcome, option spreads offer a defined-risk way to express a view. If we expect a stronger-than-forecast core CPI, a bear put spread would capitalize on a stronger dollar as rate cut expectations get pushed out. Conversely, a surprisingly soft inflation reading would likely weaken the dollar, making a bull call spread an attractive position.
