**US Dollar Price Forecast: Inflation Miss Sparks Pullback in USD – Impact on EUR/USD and GBP/USD**
*By James Hyerczyk, originally published on FXEmpire.com*
The United States Dollar (USD) experienced a retreat in the wake of a softer-than-expected U.S. inflation report, indicating waning price pressures and prompting market participants to reassess the Federal Reserve’s future monetary policy stance. The pullback in the greenback has had implications across major currency pairs, particularly EUR/USD and GBP/USD, as traders and investors recalibrate expectations.
This article explores the key drivers behind the USD’s recent weakness, the inflation report that catalyzed the move, and how the euro and British pound have responded amid shifting sentiment and market positioning. We also examine technical and fundamental outlooks with a focus on short to medium-term dynamics in the foreign exchange (forex) markets.
**U.S. Inflation Comes in Softer Than Expected**
The primary catalyst for the USD’s pullback was the release of the latest U.S. Consumer Price Index (CPI) data. The report showed:
– Headline CPI for the month slipped to 0.2%, slightly below expectations of 0.3%
– Core inflation, which excludes volatile food and energy prices, also cooled, registering a monthly gain of 0.2%
– On a year-over-year basis, core inflation decreased from 3.6% to 3.4%
– Overall, consumer price pressures showed signs of moderating more quickly than analysts and the Federal Reserve had projected
This softer inflation data suggested declining pressure in underlying prices, raising questions about the longevity of high interest rate policies if inflation continues to move closer to the central bank’s 2% target.
**Market’s Reaction: Dovish Tilt in Rate Expectations**
The drop in inflation spurred a notable shift in investor expectations regarding the Federal Reserve’s policy trajectory. Market participants began pricing in a higher probability that the Fed could pause or even cut interest rates earlier than previously anticipated.
Key market reactions included:
– U.S. Treasury yields fell sharply, especially in the short end of the curve
– Fed Funds futures moved to reflect increased expectations of a rate cut within the next two quarters
– The dollar declined relative to most of its major counterparts amid expectations of a less aggressive Fed posture
Investors had become more sensitive to incoming data, especially given Fed Chair Jerome Powell’s data-dependent stance. Consequently, markets began speculating that the Fed could be nearing the peak of its tightening cycle.
**US Dollar Index – Technical Pullback in Focus**
The U.S. Dollar Index (DXY), which measures the greenback’s value against a basket of six major currencies, retreated from recent highs as the inflation numbers disappointed hawkish bets.
Key technical observations:
– The index hit resistance near the 106 level in recent weeks before falling back toward support around 104.50
– The 50-day moving average remains a key line of support, currently aligning near the 104 area
– A break below this threshold could open the door to further weakness toward 103.50 and potentially 103, a level last seen in early May
– Momentum indicators such as RSI are turning lower, suggesting weakening bullish momentum and signaling a potential short-term trend reversal
While the broader uptrend since mid-July remains intact, the recent retracement may test the resolve of dollar bulls unless there is a reversal in inflation dynamics or renewed hawkish rhetoric from the Fed.
**EUR/USD Climbs on Dollar Weakness**
The euro gained ground against the U.S. dollar in response to the inflation data, with EUR/USD rebounding after a period of consolidation.
Fundamental drivers for euro support include:
– Relief from Fed-related dollar strength, giving the euro room to breathe
– Relatively stable eurozone economic data that has allowed the European Central Bank (ECB) to maintain a moderately hawkish tone
– Mild strength in eurozone inflation, particularly in
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