EUR/USD slipped to a seven-session low on Friday after U.S. August month-on-month core CPI surprised to the upside, triggering a spike in the U.S. interest rate complex and dollar as markets raised the odds of a Fed rate hike next week and beyond. Despite this near-term pressure, however, the pair retains upside potential if those hikes actually materialize.

The stronger-than-expected core CPI print boosted the probability that the Fed will hike rates next week. If the Fed follows through and signals that its inflation fight is far from over, it would point to further tightening ahead and underscore the central bank's seriousness about controlling inflation.

Interestingly, price action at the long end of the Treasury curve hinted that this inflation battle may already be underway: after spiking to fresh multi-year and multi-decade highs, both 10-year and 30-year yields reversed course and moved lower.

This reversal suggests a broader dynamic—if the Fed's anti-inflation stance is genuine, economic growth could slow, eventually forcing the Fed toward rate cuts down the road. The pullback in Treasury yields and the dollar may already reflect investors positioning for that outcome.

Should this scenario continue to unfold, the dollar could find it difficult to sustain a rally and might instead weaken further as market participants unwind long-dollar positions. A softer dollar backdrop would be supportive for EUR/USD, potentially fueling a rally toward the 2025 yearly high.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)