The Euro fell against the US Dollar on Tuesday after US inflation data came in above forecasts and US Treasury yields rose. EUR/USD traded near 1.1743, down about 0.35% on the day.
US headline CPI rose 0.6% month-on-month in April after 0.9% in March, in line with expectations. Year-on-year CPI rose to 3.8% from 3.3%, above the 3.7% forecast.
Us Inflation Surprises Lift Dollar
Core CPI rose 0.4% month-on-month, up from 0.2% and above the 0.3% forecast. Annual core inflation increased to 2.8% from 2.6%, above the 2.7% forecast.
April marked a second straight rise in US inflation, with higher energy prices linked to tensions in the Strait of Hormuz. The data, along with last week’s Nonfarm Payrolls report, supported expectations of higher US rates for longer.
CME FedWatch shows markets expect no change in the coming months, with a 13.5% chance of a September hike and about 32% for December. The Dollar Index was near 98.37, up about 0.35%.
In the Eurozone, markets price in at least two ECB rate rises this year as energy costs add inflation risk. Higher energy exposure also raises growth concerns, which may limit policy tightening.
Policy Divergence Drives Eurusd Volatility
We are seeing a very different market compared to the inflationary pressures of last year. In May 2025, when US annual inflation was hitting 3.8%, EUR/USD was trading near 1.1743. Today, with the pair hovering around 1.0750, the dollar’s persistent strength tells a new story about policy divergence.
Last year’s data showed an accelerating core CPI that pushed traders to price in rate hikes. We have seen inflation cool since then, with the latest April 2026 CPI report showing a year-over-year rate of 2.9%, which is still stubbornly above the 2% target. This persistent inflation means the Federal Reserve is likely to keep interest rates steady for longer, shifting the focus from hikes to the timing of an eventual cut.
This environment of holding steady creates a different kind of uncertainty, making options strategies attractive. While last year’s trend pointed clearly towards a stronger dollar, the current market is more about timing and less about direction. Buying straddles or strangles on the EUR/USD could be a viable strategy to profit from a significant price move when the Fed finally signals its next step.
The situation in the Eurozone is also a key factor, where economic growth has been lagging more than in the US. The European Central Bank may be forced to consider cutting rates sooner than the Fed to stimulate the economy, despite their own inflation concerns. This potential policy divergence is a primary driver weighing on the Euro and supporting the dollar.
We should therefore pay close attention to the implied volatility in options contracts maturing around ECB and Fed meeting dates later this year. According to the CME FedWatch Tool, the probability of a Fed rate cut by September 2026 is only around 25%, reflecting deep uncertainty. Any data that shifts this probability will create trading opportunities, and derivatives offer a way to position for these shifts in market sentiment.
