Do not wake trouble while it is quiet. Markets dislike change, and the Federal Reserve dislikes it even more. Therefore, the July U.S. inflation report, which was very close to expectations, was a real gift for EUR/USD traders.

Inflation dynamics in the U.S.

According to the Bureau of Labor Statistics, core CPI rose by 0.2% month-on-month and 2.5% year-on-year — the slowest pace since March 2021. The overall consumer price index added only 0.1% month-on-month. The interest rate differential that has worked against the single currency in recent months is beginning to lose its edge: according to CME Group, futures markets price in a 58% probability of the Fed holding rates in September, up from 54% before the release and 52% the day before.

Some investors even doubt that raising rates now makes sense. They argue that Fed tightening right now would only add to the economy's pain without solving supply problems. FOMC officials' words no longer enjoy unconditional trust, but the market heard exactly what it wanted to hear — and the euro got a breather.

Dynamics of Fed rate-hike odds

However, it is too early to celebrate. The return of tariffs, ruled illegal by the Supreme Court, is turning into an unexpected fiscal stimulus: more than 40 S&P 500 companies have already reported refunds totaling $9.6 billion, and the customs agency has approved $128.7 billion for processing. This could revive the narrative of American exceptionalism that has repeatedly nullified EUR/USD hopes.

At the same time, Deutsche Bank Research warns that markets are pricing in a "Goldilocks" scenario — strong growth, central banks tightening only modestly, and supply shocks proving temporary. In reality, this is an overly optimistic combination, leaving little room for error. Closure of the Strait of Hormuz or a new escalation could in one day return demand for the dollar as a safe-haven asset, wiping out all the euro's gains.

Nevertheless, while trouble sleeps, EUR/USD has a chance. The softening of the Fed's hawkish rhetoric reduces the premium for tightening, and investors, exhausted by FOMO — the fear of missing out — readily treat a pause in monetary restriction as a reason to buy risk. The divergence between a cautious Fed and a silent European Central Bank temporarily works in favor of the regional currency.

Meanwhile, the ECB remains silent, giving the U.S. dollar the right of first move. Silence, however, is also a position, and the market can interpret it in any way it chooses.

Will trouble wake up before the euro manages to use the breather? I doubt the quiet will last long.

Technically, on the daily chart, EUR/USD is fighting for the 2-4 line of the Wolfe Wave pattern. A rebound from it is a good sign for the bulls. Chances of a continued rally remain. A breakout of fair value at $1.154 from below will be a signal to form long positions on the euro.