A mixed U.S. inflation report pressured the greenback. The dollar index returned to 98.00, while the EUR/USD pair refreshed its weekly high, rising to 1.1491. Additional pressure on the U.S. currency came from Donald Trump, who disclosed details of the future trade deal with China. The terms of the "truce" were unappealing to dollar bulls despite the enthusiastic commentary from the White House.
Inflation First
According to the report, the monthly core CPI in May slowed to 0.1% after holding steady at 0.2% for two months (the forecast was for it to remain unchanged). On an annual basis, overall CPI rose to 2.4%, though most analysts had expected a more substantial increase to 2.5%. On the one hand, the growth was minimal (previously 2.3%), but considering that CPI had been declining for three months in a row, even this modest increase is meaningful as it reflects the impact of import tariffs.
The core Consumer Price Index (excluding food and energy) fell to 0.1% month-on-month (versus a 0.3% forecast) and remained at 2.8% year-over-year—matching April and March readings—while analysts had anticipated an increase to 2.9%.
All components of the release landed in the "red zone," falling short of expectations. However, it's worth noting that this was the first acceleration in U.S. inflation in four months.
Breakdown of Price Changes
Housing and service costs were the main contributors to the price rise. The report showed a 3.5% drop in energy prices in May. Clothing prices declined by 0.9%. On the other hand, food prices rose by 2.9%, electricity by 4.5%, medical services by 3.0%, and transportation services by 2.8%. Vehicle prices also climbed: used cars by 1.8% and new cars by 0.4%.
What does this data tell us? First, the full impact of the new tariffs has yet to be reflected in inflation. CPI continued to decline in April despite Trump's new tariff plan taking effect on April 9. The May data showed a slight acceleration year-on-year but fell short of most analysts' expectations.
Second, the May report allows the Federal Reserve to maintain a wait-and-see approach in upcoming meetings—especially after a relatively solid Nonfarm Payrolls report showing a 140K employment increase. Meanwhile, the market is increasingly confident that the Fed will cut rates in early autumn, specifically in September. Following the inflation data release, the probability of a 25-basis-point cut in September rose to nearly 70%, up from less than 60% beforehand. Traders remain almost 100% certain that the Fed won't ease policy in June or July.
I think it's still too early to draw conclusions about September. Three more inflation reports are due before that meeting, and the Fed won't make decisions based on a single data point. Moreover, given Trump's statement, traders may be more concerned about the risks of stagflation than rate cuts.
Impact on EUR/USD
That's precisely why the EUR/USD movement occurred on Wednesday. The inflation report fueled the fire but was not the main reason for the greenback's weakness.
The dollar came under pressure after the U.S. president shared details of the trade agreement with China. According to Trump, the U.S. will impose tariffs on Chinese goods at a 55% rate, while China will maintain only 10% tariffs.
In reality, the tariff structure after the deal will be similar to the current one—following mutual reductions of 115%. Trump added the prior 25% tariffs from his first term to the current 30% rate.
The deal also includes mutual concessions: China will resume rare earth metal exports, and the U.S. will allow Chinese students to continue studying at American universities and colleges.
The London negotiations disappointed dollar bulls because the 55% combined tariff rate on Chinese goods remains intact. This increases the risk of "bad inflation" in the U.S.—inflationary pressure without demand growth. In this context, a rise in overall CPI is bad news for the greenback, especially amid falling ISM indices for both manufacturing and services in May.
Technical Outlook
The current fundamental background supports further growth of the EUR/USD pair. Technical indicators also confirm this: the price remains between the middle and upper Bollinger Bands on the D1 timeframe and above all lines of the Ichimoku indicator, including the Kumo cloud, which continues to display a bullish "Parade of Lines" signal. The first bullish target is 1.1510 (upper Bollinger Band on D1). If buyers consolidate above this level, the next resistance barrier will be 1.1575 (upper Bollinger Band on W1).
