EUR/USD's risk profile tilted modestly higher on Wednesday as recent U.S. data prompted investors holding long-dollar positions to reconsider their conviction. The catalyst was the in-line July U.S. CPI report, which eased fears that inflation might surprise to the upside and force the Fed into a September rate hike. In response, both the dollar and the broader U.S. interest-rate complex weakened, with markets paring the probability of a September Fed hike to below 37%, according to CME FedWatch. This shift was mirrored in rates markets, where SOFR futures rallied and the dollar's yield advantage over the euro narrowed, pushing U.S.-German 2-year yield spreads to their tightest levels since July 20.

Positioning dynamics could amplify further dollar softness. CFTC data show net-long dollar positions were trimmed from the previous reporting period but remain elevated, suggesting that continued weakness in U.S. rates could trigger additional unwinding of long-dollar bets, a dynamic that would likely support EUR/USD.

Technical indicators reinforce the bullish tone: rising daily and monthly RSIs, still below overbought territory, point to building upward momentum, while EUR/USD's position above its 10-, 21-, and 55-day moving averages provides further confirmation.

Looking ahead, attention now turns to Thursday's July PPI release. Should the data print in line with or below expectations, it could provide further momentum for a EUR/USD rally, extending the dollar's recent vulnerability.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)