"Don't fight the Fed" is the old Forex maxim. For several days after the midterms, investors looked for direction for EUR/USD across commodity, equity, and bond markets. The October inflation prints showed where the answer lay.

Consumer prices rose by 0.4% m/m in October, and core CPI increased by 0.3% m/m, both above Bloomberg consensus. Wall Street Journal calculations using monthly data suggest that headline CPI's y/y rate accelerated from 2.7% to 4.0%, while the Fed's preferred gauge, the core PCE price index, sped up from 3.1% to 3.3%, the highest since November 2023.

The dollar was supported by a sharp rally in 2-year Treasury yields, the fastest in 19 months, while 10-year yields briefly rose above 5%.

Fed rate dynamics and market forecasts

The euro's decline began even before the data release. The immediate trigger was a speech by Fed Governor Christopher Waller, who said strong CPI prints would justify a 50-bp rate hike in December. Waller argued that delay would risk the Fed's credibility and said he was not willing to take that chance.

Repricing in the money market also weighed on EUR/USD. Odds of a 25-bp hike in December rose from 84% to 86%, and CME swaps now price in roughly three tightening moves over the next year with a 70% probability, up from two moves previously priced.

Dynamics of December Fed rate expectations

Investors are now betting not just on a return to the policy stance of August 2025 but on a longer tightening cycle that could push the fed funds rate above 4.5%.

A political angle is not ruled out. Some FOMC members pushed for a rate hike in October, and any perceived delay casts a shadow over Fed Chair Kevin Warsh, who was reportedly reluctant to upset Donald Trump ahead of the midterms.

The dollar's bullish case is that accelerating inflation, combined with a strong labor market, signals overheating. However, markets will have to judge whether this reaction is as emotional as previous ones.

In short, faster inflation and a hawkish shift in interest rate expectations give the dollar room to strengthen. The downside risk for EUR/USD is that markets overreacted emotionally to recent events.

Technically, the daily EUR/USD chart shows the price returning to the lower boundary of the fair-value band at 1.115–1.125. A break below the support level of 1.115 would justify increasing short positions.