EURUSD, despite yesterday’s Powell-related developments, has broken below the daily trendline. The fundamental outlook is turning against the euro, at least in the short to medium term. Shifting inflation expectations are starting to favor the U.S. dollar, partly due to the growing impact of tariffs reflected in the CPI data. 

This week’s inflation report showed increases across goods, services, energy, and food prices. Although shelter inflation, which accounts for more than 36% of the CPI basket, continued to decline, headline inflation still rose to 2.7%, and core inflation reached 2.9%. Goods inflation remains relatively low, but the uptrend is clear and likely to continue as the tariff effect builds. 

(EU – US 5 Year Inflation Swap Spread vs EURUSD) 

The 5-year inflation swap spread between the U.S. and the EU has been declining since March. Inflation expectations are closely correlated with currency movements, and the U.S.–EU spread often leads EURUSD trends. 

Since May, a significant divergence has emerged between the spread and EURUSD. This gap suggests that EURUSD may have risen too far relative to inflation fundamentals. 

(German – US Real 10 Year Yield Difference vs EURUSD) 

The German–U.S. real yield spread is also flashing a warning for EURUSD. Since 2022, when the spread reached current levels, EURUSD typically traded around 1.10 to 1.11. Today, however, the pair is hovering near 1.16, suggesting a potential disconnect. 

Why is the yield spread so important for EURUSD? Because for the last 5 years, 69% of EURUSD’s movements can be statistically explained by the German–U.S. real yield difference. This makes it one of the most reliable macro indicators for the currency pair. 

(EURUSD Trend) 

Inflation expectations and real yield spreads are both signaling further downside for EURUSD. With the August 1 tariff deadline approaching and no deal in sight, the pair remains under pressure. Several side developments may also influence EURUSD sentiment in the coming weeks. 

One of the key risks is unfolding in France, where ongoing budget talks include harsh spending cuts, even proposals to reduce public holidays. These measures could trigger political unrest and raise the possibility of another no-confidence vote, adding to the eurozone’s political risk premium. 

At the same time, the EU is preparing counter-tariffs that could escalate the current trade dispute into a broader trade war. If implemented, this would likely increase pressure on the euro. 

The only notable euro-positive factor at the moment is the rising political pressure on Fed Chair Jerome Powell. Although Trump does not have the legal authority to remove the Fed Chair without evidence of fraud or misconduct, there are reports he may try to use the Fed building renovation budget as a point of leverage. Trump has stated that firing Powell is “unlikely” likely recognizing that doing so would be a political gamble especially with only a few months left in Powell’s term. 

Trump might be planning to use this as a threat to keep the dollar index low in order to reduce the trade deficit, rather than to politically influence the Fed. Because, even if Powell were replaced, it is unclear whether monetary policy would shift significantly. Fed policy is determined by committee vote, not solely by the Chair, and with inflation and inflation expectations rising, the Fed is unlikely to cut rates aggressively without risking a renewed inflation flare-up. 

With all of this in mind, EURUSD’s recent break of the trendline could be the technical confirmation dollar bulls have been waiting for. The first downside target lies near 1.1430, followed by 1.1100 depending on the news flow. However, if Powell were unexpectedly removed, this could shift the outlook and provide temporary relief for the euro.