EUR/USD traded near 1.1870 on Friday, recovering part of earlier losses and remaining little changed on the day. The pair was still on track for small weekly gains after softer US inflation data weighed on the Dollar.
US headline CPI rose 0.2% month on month in January, down from 0.3% in December and below expectations. Annual CPI eased to 2.4% from 2.7%, under the 2.5% forecast.
Us Inflation Data And Market Reaction
Core CPI excluding food and energy increased 0.3% month on month, matching expectations and up from 0.2%. The annual core rate edged down to 2.5% from 2.6%, in line with forecasts.
After the release, the US Dollar pared earlier gains and Treasury yields fell further, as markets increased expectations for Federal Reserve easing. The Dollar Index traded near 96.91, down from an intraday high of 97.15.
Rate futures moved to about 61 basis points of cuts in 2026, from roughly 58 basis points before the report. CME FedWatch showed around a 65% probability of a first cut in the June–July window.
The European Central Bank was expected to keep rates unchanged through 2026. ECB policymaker Martins Kazaks said officials were monitoring euro strength and noted that a “sizeable and pacey” rise could affect the inflation outlook and prompt a response.
Strategy Implications For Eur Usd
With US inflation now showing signs of cooling, the case for a weaker dollar in the coming weeks is getting stronger. The January CPI reading of 2.4% is a notable step down, especially when we remember how inflation stayed stubbornly above 3.0% for much of 2025. This gives us more confidence to position for a higher EUR/USD exchange rate.
We should consider buying EUR/USD call options to capitalize on this expected move. A cost-effective strategy would be a bull call spread, perhaps buying the March 1.1900 calls and selling the March 1.2050 calls. This defines our risk and potential reward, creating a profitable position if the pair rises moderately as we expect.
The market has swiftly adjusted its view on Federal Reserve policy, now pricing in more than two quarter-point rate cuts for this year. This is a big change from late 2025, when the debate was still about whether we would see even one cut. We should watch the next non-farm payrolls report closely, as a weak jobs number below 150,000 would almost certainly lock in a mid-year rate cut.
However, we must be mindful of the European Central Bank, which is getting nervous about the Euro’s strength. Verbal warnings from policymakers are likely to increase if the pair pushes towards the key psychological level of 1.2000. This threat of intervention will likely cap the upside for now and could cause short-term pullbacks.
Historically, we’ve seen similar policy divergences create strong trends, like in 2014 when the ECB was easing while the Fed was tightening. That period also showed that sharp, news-driven corrections are common even within a strong trend. Therefore, any dips in EUR/USD caused by ECB jawboning should be seen as buying opportunities rather than a reason to abandon the bullish outlook.
