The market is tired of shocks. It has decided for itself to sell the euro. Therefore, investors were not scared by the sharp increase in the probability of the Fed's "dovish" pivot in September to 85% after the publication of producer price data. Before the release of the consumer inflation data, it was 63%. Increasing the chances of easing the Fed's monetary policy is usually a "bullish" factor for EUR/USD. But not this time.

Buy first, then figure it out. Markets grow on emotions, but when investors start thinking, everything falls into place. Despite the slowdown in CPI to 4.9%, the lowest mark in two years, core inflation remains at elevated levels. A monthly increase of 0.4% is too high for the Fed to decide to abandon the tightening of monetary policy completely. And that means it's time for EUR/USD to fall—which it did.

If we dig deeper, inflation for services is accelerating in the U.S., while goods prices are confidently moving down toward the 2% target. To start discussing the topic of lowering the rate, a cooling of CPI in the service sector is needed. This will happen when the labor market cools down.

Dynamics of U.S. inflation

With the current employment growth rates and inflation levels, the best decision is to keep the cost of borrowing at 5.25%. This is what FOMC officials unanimously say. Investors have not believed them so far. However, the principle of "don't bet against the Fed" always works. And now markets are realizing that they were wrong.

That's why the 0.2% rise in producer prices, not 0.3% MoM as Bloomberg experts predicted, did not lead to a surge in EUR/USD. The base indicator of 0.2% met expectations. Derivatives immediately increased the chances of a rate cut in the federal funds in September to 85%, but this did not help the regional currency.

According to ING research, the euro is the most overvalued G10 currency unit. Net long positions on EUR/USD reach 22% of open interest. This is the highest level since the beginning of 2021. In such conditions, the breakout of the consolidation range 1.095–1.105 logically triggered a cascade of order execution and the pair's fall to the area of the monthly low.

The news of the first rise in consumer inflation expectations since October did not help the euro. The annual indicator jumped from 4.6% to 5%. This is a bad sign for the ECB. It means that the tightening of monetary policy has not yet brought results. More needs to be done. For example, raise the deposit rate to 3.75%. However, this factor is already taken into account in the quotes of the main currency pair. The regional currency remained indifferent to it.

Technically, on the daily chart, EUR/USD has started the long-awaited correction. Rebounds from resistances at 1.095 and 1.097, where the lower border of the fair value range and the fair value itself are located, are suitable for building up short positions formed from the level of 1.101. The pair's inability to return above the blue moving average is also a reason for sales.