EUR/USD Jumps Following Soft US CPI

The euro (EUR/USD) continued its rebound on Wednesday morning, 14 May, which began on Tuesday. 

A weaker-than-expected inflation rate for April soured demand for the US dollar, spurring a rebound in major forex pairs, including EUR/USD. The drop in the dollar follows its strongest one-day jump in 3 weeks on Monday after the announcement of the 90-day tariff truce between the US and China.

EUR/USD Price Performance Chart

The EUR/USD forex pair has rebounded off its upwardly sloping 50-day moving average. Swing traders sometimes use a moving average as dynamic support or resistance during uptrends or downtrends.

*Past performance does not indicate future results 

US Dollar Drops After CPI Miss

The US consumer price index (CPI) for April rose by 0.2%, lower than the 0.3% expected by economists. That puts the 12-month rate at 2.3%, which is the lowest rate in over four years.

The perception among some economists and investors is that higher US tariffs will feed through to higher prices and lead to a rise in inflation. However, so far, that has not been borne out in the data. A slowing US economy could mitigate the inflationary effects of tariffs. 

The US dollar index (DY) is still trading around 3% lower than it was on April 2, when Trump’s “Liberation Day” tariffs sparked a wave of foreign investors selling US assets.

Euro Recovers from Sharp Drop

The euro was impacted by US dollar strength on Monday, as EUR/USD slid over 100 pips from above 1.12 to under 1.11. Likewise, it benefited from dollar weakness following the CPI report.

Adding fuel to the euro rebound was news that German business sentiment rebounded in May, with the ZEW index jumping to 25.2 from -14.0, beating forecasts but still below March’s 51.6. Renewed optimism has perhaps been supported by hopes surrounding the announced  €800bn government stimulus. However, the current conditions index remains deeply negative at -82, near its lowest this century. (Source: FXPro)

EUR/USD and the Trade War

The euro has been among the beneficiaries of a weaker dollar since the Trump tariffs were first announced.

The 90-day trade truce, as well as trade deals signed with the UK and potentially others in the pipeline, reduce the threat of a US recession, perhaps alleviating some of the downward pressure on the US dollar and creating a headwind for the euro.

On the other hand, easing trade and geopolitical tensions could also remove some of the impetus for the European Central Bank (ECB) to further cut interest rates.

Conclusion

EUR/USD has rebounded sharply as softer-than-expected US inflation data weighed on the dollar, reversing Monday’s tariff-driven surge. 

While the 90-day trade truce and stabilising inflation have eased fears of a US recession, the dollar remains under pressure, down 3% since early April. Meanwhile, improving German sentiment and hopes for stimulus have added support to the euro, though risks remain, with weak underlying economic conditions and the ECB’s next move still uncertain.

*Past performance does not indicate future results