Euro Gains as Softer U.S. Inflation Hits US Dollar

Key Moments

Euro Supported by Softer U.S. Inflation and Fed Pause Expectations

The EUR/USD pair attracted additional buying interest during the Asian session on Friday, extending the prior day’s rebound from around the 1.1500 psychological level, which marked an over one-week low. Despite the uptick, the currency pair stayed locked in a two-week trading range and was last seen below 1.1550 amid conflicting fundamental drivers.

U.S. inflation data released on Thursday showed the Producer Price Index (PPI) missing forecasts. Together with previously soft Consumer Price Index (CPI) figures, the data indicated a moderation in overall price pressures. This backdrop provides the U.S. Federal Reserve with scope to keep interest rates unchanged and has pushed the U.S. Dollar to remain depressed below the two-week low reached on Thursday, offering a tailwind to EUR/USD.

ECB Tightening Expectations Lend Additional Euro Support

On the European side, the common currency has been underpinned by increasing market conviction that the European Central Bank will implement one final 25-basis-point rate increase at its September meeting, with inflation still above the 2% objective. This policy divergence narrative has been mildly constructive for the euro.

However, the supportive rate backdrop is being offset by a risk-averse undertone stemming from geopolitical tensions, which is preventing market participants from positioning too aggressively on further EUR/USD upside.

Geopolitical Tensions Reinforce Safe-Haven Demand for the Dollar

Geopolitical risks have intensified in several regions, bolstering demand for the U.S. Dollar as a safe-haven asset and restraining the euro’s advance.

In recent developments, NATO fighter jets shot down a drone over Latvian airspace early Friday. Finland also introduced a temporary restriction on aviation and maritime traffic in the eastern Gulf of Finland. In parallel, Reuters reported that Russia intercepted 15 drones near its border with Finland and Estonia overnight, representing a further escalation in an over six-year-old Russia-Ukraine conflict.

Beyond Europe, traders continue to account for a war-risk premium amid tensions between the United States and Iran over the Strait of Hormuz. Additionally, Iran-backed Houthis in Yemen have intensified attacks on ships in the Red Sea and Bab el-Mandeb Strait, and have claimed responsibility for a drone strike on a Saudi Aramco refinery. These developments heighten the risk of a wider regional confrontation, which is seen as supportive for the USD and likely to cap further gains in EUR/USD.

EUR/USD Technical Picture: Range-Bound but Biased Higher

From a technical standpoint, the EUR/USD pair retains a mildly constructive short-term outlook while trading above the 200-period Exponential Moving Average (EMA) on the 4-hour chart. A decisive move through the upper boundary of the two-week range, located near 1.1565, is viewed as necessary to confirm additional upside potential.

On the downside, initial support is aligned with the lower edge of the range around the 1.1500 region. More significant buying interest is noted near the 200-period EMA at approximately 1.1489, which reinforces a broader floor for the pair on this timeframe.