Euro retreats below 1.1650 as inflation data buoys US Dollar ahead of Jackson Hole

EUR/USD: Mildly bearish, but event-risk dominated

The immediate bias is negative for EUR/USD because stronger US PCE inflation reinforces the possibility that the Federal Reserve may keep policy restrictive or even raise rates in coming months. That supports the dollar through higher expected US yields and reduces the appeal of euro-denominated assets. The pair’s retreat below 1.1650, following its reversal from above 1.1700, suggests that the market is temporarily prioritizing the US inflation signal over improving German data.

The move is not yet a decisive change in the policy outlook: reported market pricing for a September Fed hike remained around 36%. This limits the immediate scope for a sustained dollar surge unless upcoming Fed communication materially shifts rate expectations. In practical terms, the dollar’s support is more dependent on Treasury-yield direction and the repricing of future Fed decisions than on the inflation release alone.

Jackson Hole is the key catalyst. A hawkish message from Fed Chair Kevin Warsh—particularly concern that inflation remains persistent or that additional tightening may be required—could extend EUR/USD downside and strengthen the broader USD complex. Conversely, if he emphasizes that policy is already restrictive and that the Fed needs more evidence before acting, the recent dollar gains could unwind as traders reduce tightening expectations.

The euro has some offsetting support. Better German consumer sentiment, an upward revision to second-quarter GDP, and stronger IFO data indicate that the Eurozone growth narrative is improving. ECB minutes suggesting a September hike could also provide support, although that outcome is reportedly already priced and the minutes may offer limited guidance beyond September. The market therefore appears to be assigning greater marginal importance to the Fed than to the ECB at present.

Trading interpretation:

near term, the balance remains bearish-to-neutral for EUR/USD, with downside risk concentrated around a hawkish Jackson Hole repricing. A dovish Fed message could produce a sharp corrective rebound, especially because the ECB tightening outlook and recent German data provide a foundation for euro recovery. The initial dollar-positive interpretation would be weakened by falling US yields, unchanged Fed hike pricing, or evidence that US inflation is not broadening.

Monitor next:

Warsh’s speech on Friday, US Treasury yields, changes in September and subsequent Fed rate expectations, the ECB minutes, and whether EUR/USD can stabilize after breaking below the 1.1650 area.