The EUR/USD pair held steady near $1.14 on Tuesday as investors awaited US inflation data, which is expected to be a key driver for currency markets and the Federal Reserve’s monetary policy outlook. The pair traded in a narrow range between $1.1380 and $1.1400 , with trading volumes low as markets awaited the release of the US Consumer Price Index (CPI), the results of which are expected to determine the future direction of the dollar and other major currencies.

Despite the calm daily movements, the US dollar continues to maintain its momentum, supported by expectations that interest rates will remain at high levels, which has boosted demand for the US currency over the past months.

Since peaking near $1.21 in late January, the euro has fallen by about 6% against the dollar, as the divergence in monetary policy expectations between the United States and the Eurozone has widened. Higher interest rates are a key support for currencies, as they increase the attractiveness of currency-denominated assets and offer investors higher returns on deposits and fixed-income instruments, which currently benefits the dollar.

The dollar’s strength isn’t limited to the euro; it extends to most major currencies. The British pound continues its downward trend near $1.34 , despite a recent modest recovery of around 1.5% supported by political developments in the UK.

The Japanese yen continues to trade at one of its weakest levels in nearly four decades, with the USD/JPY pair trading above 162 yen per dollar . This has heightened market anticipation of potential intervention by Japanese authorities to support the currency if the decline continues. Analysts believe that the current situation in the currency markets reflects the overall strength of the dollar, not just the weakness of the euro or other currencies.

Investors are focused on the release of the US Consumer Price Index (CPI) for June, with forecasts indicating a slowdown in the annual inflation rate to 3.8% , compared to 4.2% in May. Despite expectations of a decline, traders believe the report could hold surprises that alter market expectations regarding US monetary policy. Federal Reserve member Christopher Waller confirmed that the option of raising interest rates again remains on the table if inflationary pressures persist, noting that core inflation , which excludes food and energy prices, was trending upward even before the recent surge in oil prices.

Market pricing currently indicates that the probability of an interest rate hike at the July meeting remains below 50% , but higher-than-expected inflation data could bolster this probability and push the dollar to further gains. Conversely, if the inflation reading falls short of expectations, it could give the euro a chance to recover some of its recent losses, as bets on further monetary tightening by the Federal Reserve diminish.