EUR/USD was mostly unchanged. The Dollar Index edged higher ahead of the January US CPI release. Investors are watching the data closely because it was delayed by the partial government shutdown.
Deutsche Bank economists forecast January headline CPI at +0.26% month on month, down from +0.31% in December. They expect motor fuel prices to fall by 2.4%, which could pull the headline number lower.
They also expect core CPI to be stronger at +0.35% month on month. Markets have shifted their expectations for US rate cuts after a run of weaker US data.
Pricing for the December meeting implied 53bps of cuts, up 5.3bps on the day. The article adds that markets still price in more easing under a new Fed Chair.
With EUR/USD quiet, focus is on the next CPI report and what it means for the Federal Reserve. Markets are pricing roughly 50 basis points of rate cuts by year-end, but confidence is low. A CPI surprise could quickly change that view and trigger a sharp move in the pair.
A similar setup happened in early 2025, when a delayed January CPI report sparked heavy debate. Headline inflation was weak because energy prices fell, but core inflation was much stronger. That mixed message made the Fed outlook unclear. The parallel is a reminder to look past the headline figure and study the details.
This uncertainty suggests implied volatility in near-term EUR/USD options may be too low. Buying volatility with structures like straddles could make sense, since they can profit from a big move in either direction. Tight ranges often break, and CPI is the most likely trigger.
Recent data from late 2025 and early 2026 supports this view. GDP growth slowed to 1.5% in Q4 2025, but January payrolls still rose by 180,000. With signals pointing both ways, the Fed remains data-dependent, and markets remain unsure.
For traders with a directional view, option spreads offer defined risk. If core CPI is stronger than expected, a bear put spread could benefit from a stronger dollar as rate-cut expectations move out. If inflation is softer than expected, the dollar would likely weaken, making a bull call spread more attractive.
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