The EUR/USD exchange rate rose nearly to 1.1125 as the US Dollar weakened following lackluster US inflation data for April. The US Consumer Price Index (CPI) increased by 2.3% year-on-year, below expectations, while the core CPI showed a steady increase of 2.8%.

The data has raised hopes for interest rate cuts by the Federal Reserve, which has put downward pressure on the US Dollar. The US Dollar Index fell to around 101.40, partially reversing gains made after the US and China reached a temporary trade agreement.

Limited Progress in Trade Discussions

Despite the temporary easing of trade tensions, the limited progress in US-EU trade discussions kept the Euro’s performance subdued. The EU is prepared to implement countermeasures against the US if trade negotiations do not reach a favourable conclusion.

Technical analysis shows the EUR/USD pair temporarily recovering after a recent decline, but remains below critical resistance levels. A major resistance is noted at the April 28 high of 1.1425, and key support at the March 27 low of 1.0733 signals critical levels for future price moves.

Based on what’s laid out, the softer-than-expected US inflation data has prompted a downward re-pricing of near-term rate expectations. The CPI figure rising only 2.3% over the previous year and the core component holding at 2.8% suggest inflationary pressures are easing more than initially forecast. This development has weakened the dollar, nudging the EUR/USD pair closer to the 1.1125 mark. Markets reacted promptly, pulling the US Dollar Index lower towards 101.40, after previously climbing due to tentative progress in US-China talks.

However, with US-EU trade dynamics showing little development, there’s still caution from the Euro side. Brussels appears braced for retaliatory action should negotiations stall, even as the broader risk mood improves.

Interpreting the Market Reaction

We should interpret the current bounce in the EUR/USD from a position of restraint. The recent upward move appears corrective in nature, showing a technical reaction rather than a shift in long-term direction. The pair is still well below the 1.1425 high seen at the end of April, which stands as an upper boundary that isn’t easily overcome without fresh economic momentum or policy support. On the downside, eyes remain near the 1.0733 level from the end of March. That level functions less like a floor and more like a trapdoor—once breached, deeper falls become increasingly likely.

What this points to is a broader sideways range trade, with volatility still compressed and macro forces pulling in more than one direction. We’ve noticed implied volatility in the FX options space is no longer pricing in much movement. That tells us markets are currently waiting for either a policy shift or a definitive macro trigger. Incoming US data, especially payrolls and any clues from FOMC speakers, will be watched closely for guidance on how real the rate cut bets are becoming.

From a trading perspective, we’re keeping close tabs on positioning around 1.1100. If interest builds around this zone but follow-through is absent, it’s more likely we’ll see option sellers dominate and fade any climbs above. Similarly, should price gravitate towards the 1.08 area with no deterioration in fundamentals, it might attract conditional support.

For now, we’re tracking short-dated options flow and the slope of the yield curve on both sides of the Atlantic to filter the next likely move. Markets are unconvinced either central bank will act decisively in the coming four weeks, but the probability distribution has tilted. If anything, there’s slightly more room for disappointment on the US side, particularly if soft prints become the trend rather than a one-off.

We would also highlight that the Euro’s response has been somewhat contained, not because the movement lacks conviction, but because market attention may be temporarily diverted. There’s a lot of focus on relative real yield differentials, and unless the European Central Bank hints at adjusting their own path, the Euro might not enjoy sustained relief.

All of this makes the next round of data even more important—not so much for what it shows on the surface, but for how it shifts the expected timing of policy action. We’ll be scrutinising futures pricing and the shape of the forward curve, as they’ve started to lean toward a dovish Fed, but only marginally. Until that sentiment deepens, these rallies in EUR/USD are best viewed through a tactical rather than strategic lens.

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