Euro-to-Dollar Forecast: Route to 1.20 Just Became Harder

Market impact: moderately bearish for EUR/USD, but not a one-way dollar signal.

The key change is not simply that US core CPI exceeded expectations; it is that the data has shifted the expected policy gap toward the Federal Reserve. August core CPI rose 0.3% month-on-month versus 0.2% expected, prompting MUFG to move to a 25-basis-point Fed hike forecast for September. That increases the near-term advantage of the dollar through higher expected US yields and reduces the probability of the Fed remaining on hold while the ECB continues tightening.

EUR/USD therefore faces downside pressure, with the article identifying MUFG’s 1.14 scenario versus a Friday close near 1.1599. The more important market mechanism is forward guidance: a September hike is reportedly already priced with roughly 85–90% probability, so the actual decision may produce only limited additional dollar gains. A sustained move toward 1.14 would require the Fed to signal further tightening or a higher-for-longer stance at subsequent meetings—not merely deliver the widely anticipated hike.

The euro is not without support. The ECB has raised its deposit rate to 2.50% and continues to project above-target inflation, preserving the possibility of further European tightening. That limits the downside if the Fed’s September action is accompanied by cautious guidance, or if US growth and inflation expectations subsequently soften. In that case, the dollar’s post-CPI gains could retrace as rate-hike expectations are unwound.

Trading interpretation:

the immediate bias is bearish EUR/USD, particularly while US front-end yields and Fed expectations remain elevated. The medium-term outlook is mixed: EUR/USD could move lower if the Fed validates additional hikes, but a merely “one-and-done” hike may leave the pair vulnerable to a relief rebound. The route toward 1.20 has become less plausible in the near term because it depends on a Fed hold alongside continued ECB tightening, a combination now weakened by the inflation surprise.

What matters next:

Fed communication after the September meeting, revisions to the projected path for later meetings, subsequent US core-inflation readings, and evidence that ECB tightening expectations are either being extended or pared back. The main risk to the bearish dollar interpretation is that markets have already priced much of the expected policy shift; confirmation without a more hawkish future path could generate profit-taking in long-dollar positions.