EUR/USD was steady on Friday, keeping the range-bound trading seen this week. It traded near 1.1815 after dipping below 1.1800 earlier, as the US Dollar did not hold gains after US PPI data.
US Bureau of Labor Statistics data showed headline PPI rose 0.5% month-on-month in January versus a 0.3% forecast. December was revised to 0.4% from 0.5%, while annual PPI was 2.9% versus 2.6% expected and 3% previously.
Us Producer Prices Surprise Higher
Core PPI rose 0.8% month-on-month versus a 0.3% estimate, with December revised to 0.6% from 0.7%. Core PPI was 3.6% year-on-year, up from 3.3% and above the 3% forecast.
The US Dollar Index was near 97.64 after falling from about 97.85. Markets priced in no rate change at the Fed’s March and April meetings, with June cut odds below 50% and July at about 68%, per CME FedWatch.
In Germany, February CPI rose 0.2% month-on-month versus 0.5% expected and 0.1% prior, while year-on-year CPI slowed to 1.9% from 2.1% against a 2% forecast. HICP rose 0.4% month-on-month versus 0.5% expected and -0.1% prior, with the annual rate at 2% versus 2.1% previously.
Looking back at this time in 2025, we saw the EUR/USD pair holding steady in a tight range around the 1.18 mark. Today, the situation is vastly different, with the pair trading much lower near 1.0750, reflecting significant dollar strength over the last twelve months. That stability from early 2025 eventually broke down, establishing a clear trend that has favored the dollar.
Shifting Rate Cut Expectations
The inflation picture has also inverted, which is critical for our positioning. In early 2025, we were reacting to hot US producer price inflation that reached 3.6% on a core annual basis, while German inflation was falling below 2%. Now, the latest US core PPI for January 2026 has cooled to just 2.0% year-over-year, whereas Eurozone headline inflation remains more persistent at 2.8%.
This change directly impacts central bank expectations and our view on interest rate derivatives. Last year, the market was pushing back on the timing of a Federal Reserve rate cut, with the odds of a June 2025 cut dropping below 50%. In contrast, the CME FedWatch Tool now indicates a greater than 90% probability of at least one rate cut by the June 2026 meeting, a dramatic shift in sentiment.
Given this setup, strategies that worked in the range-bound market of early 2025 are no longer appropriate. We should anticipate that the upcoming divergence in policy, with the Fed poised to cut rates ahead of the European Central Bank, will increase currency volatility. Therefore, using options to bet on a continued downward trend for EUR/USD, such as buying puts or establishing put spreads, seems more logical than selling volatility.
