Dollar Rallies on Rising Inflation Expectations

The U.S. Dollar Index (DXY) climbed 0.15% to 98.00 this week, while EURUSD is hovering flat around 1.16900. Although the Euro weakened 0.69% last week, a drop in line with broad Dollar strength, it has fared noticeably better than the British pound. GBPUSD fell 1.11% over the same period and has lost nearly 2.0% over the last two weeks, compared to just a 0.29% decline for the Euro. This growing divergence suggests deeper forces at play beyond simple market volatility.

One key factor could be the differing trade dynamics with the U.S. The United Kingdom already has a tariff agreement with Washington, allowing GBPUSD to reflect more traditional market pressures. The European Union, however, remains in tense negotiations, making the Euro more vulnerable to policy headlines and capital flow repositioning. Since U.S. President Donald Trump granted a trade deadline extension from July 9 to August 1, the EURUSD began to retreat from the 1.18000–1.19000 resistance zone. However, renewed tariff threats just days later stalled the Euro’s decline, placing the currency in a holding pattern awaiting further clarity.

The upcoming U.S. inflation data may become a catalyst for the pair. June Consumer Price Index (CPI) is due Tuesday, with expectations of a rise to 2.6% YoY from 2.4%. Core CPI is also forecast to accelerate to 2.9% YoY from 2.8%. Should the figures confirm or exceed expectations, EURUSD is likely to test and potentially break below the 1.16500 support, opening the way to the 1.15000–1.15500 zone.

Additional pressure could come from Wednesday’s Producer Price Index (PPI) and Thursday’s retail sales figures. Current consensus leans toward continued Dollar strength, especially if inflation data remains elevated. However, with Trump pushing the Federal Reserve toward lower interest rates, surprises remain possible, particularly if the data shows any disinflationary signals.

Large investors remain cautious. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) recorded net inflows of $5.2 million last week, a modest shift after substantial prior outflows. This small repositioning might signal early signs of renewed Dollar bullishness, but the conviction is still weak.

Technically, the outlook for EURUSD remains bearish. A clear break below the 1.16500–1.16700 zone would confirm downside momentum and support a move toward 1.15000–1.15500. On the upside, any advance above 1.18000–1.19000 would challenge the current trend, potentially pointing to a long-term target near 1.22000–1.23000 — though this is unlikely to materialise during the thin summer trading period. For now, pressure remains tilted to the downside.