Traders of the EUR/USD pair interpreted the U.S. CPI report in favor of the U.S. dollar, despite the release being somewhat mixed. The report reflected an acceleration in both headline and core inflation.

The overall Consumer Price Index (CPI) rose 0.3% month-over-month in June (in line with forecasts), marking the fastest growth pace since January. On a year-over-year basis, the index accelerated to 2.7%, exceeding the 2.6% expected by most analysts, following a previous reading of 2.4%. The figure has been rising for two consecutive months, reaching its highest level since February.

The core index, which excludes food and energy prices, also showed acceleration, but landed in the red zone compared to expectations. It increased to 0.2% MoM from the previous 0.1%, while the forecast was 0.3%. On a YoY basis, the core index rose to 2.9%. On the one hand, this is the first acceleration after three months of stagnation at 2.8%, but on the other hand, most experts had expected it to hit 3.0%.

The report structure shows a 7.9% drop in energy prices. However, natural gas continued to surge (+15.3% in June after +14.2% in May). Food prices increased by 3.0%, and prices for medical and transportation services rose by 3.4%. Car prices also went up—new vehicles slightly (+0.2%) and used cars more substantially (+2.8%). Housing costs rose by 3.8% in June (down slightly from 3.9% in the previous month). Clothing, on the other hand, saw a slight decline of 0.5%.

What does this report suggest?

Primarily, it signals that customs tariffs are starting to "seep" into consumer prices. According to WSJ estimates, about 0.1–0.15 percentage points out of the +0.3% monthly CPI increase can be attributed to the "tariff effect." In other words, nearly half of the growth is related to tariff-sensitive goods. However, the key inflation drivers (services and housing) continue to rise at a moderate pace.

So why did the market initially shrug off the report (EUR/USD rose by only 20 pips), only to then interpret it in favor of the greenback?

The main reason lies in the weakening of dovish expectations regarding the Federal Reserve's future actions. The report casts doubt on the likelihood of a rate cut in September. Although the shift began earlier (after the release of the June Nonfarm Payrolls), the data prompted traders to reassess their forecasts. According to the CME FedWatch Tool, the probability of the Fed maintaining a wait-and-see approach in September has risen to nearly 50%. For comparison, in early July, the chance of a rate cut in September was over 90%. Now, traders see the odds as 50/50. At the same time, market participants are nearly unanimous in their expectation that the Fed will maintain its current policy unchanged at the July meeting (98% probability).

It appears traders are viewing the CPI report through the lens of recent comments from Fed Chair Jerome Powell, who repeatedly emphasized that uncertainty over the impact of tariffs on inflation and the economy is one of the main reasons the Fed is on pause.

Inflation is, de facto, accelerating—and traders are drawing their conclusions accordingly.

However, it's important to recall the key signals from the Fed's June meeting minutes, released last week. According to the minutes, Fed members view tariff-driven inflation as "temporary or limited." Most of them have not abandoned the declared course toward monetary policy easing, leaving room for one or two rate cuts by the end of the year.

Therefore, the "triumph" of the greenback may prove short-lived. If Fed officials continue to argue that the inflation spike is temporary and the easing path remains intact, the EUR/USD pair could quickly return to its previous range of 1.1680–1.1750. This scenario seems quite likely, especially given that the bulk of Core CPI consists of services and housing sectors not directly influenced by foreign trade tariffs. As such, the Fed may well interpret the June acceleration in inflation as a temporary phenomenon. Moreover, both services and housing prices are rising steadily, without signs of acceleration.

All this suggests that, in the context of medium-term trading, holding short positions on EUR/USD remains a risky strategy. A wait-and-see stance is preferable, or long positions if the downward impulse fades, especially if sellers fail to break through the 1.1600 support level, which corresponds to the Kijun-sen line on the daily chart.