The U.S. CPI report for April, released on Tuesday, indicated a slowdown in headline inflation and stagnation in the core index. Many components of the report were weaker than expected, but the dollar largely ignored the data. The EUR/USD pair rose by several dozen pips and held within the 1.11 range, while the dollar index gradually slipped toward the 101.00 level.

But this isn't just about the inflation report—the reality is that market enthusiasm over the temporary trade truce has simply faded. In place of the initial elation has come the "hangover": the realization that the truce is only temporary and the actual negotiations could drag on for months. Amid this context, EUR/USD bears quickly took profits, effectively halting the downward momentum. The CPI report, although important, was overshadowed by events from the previous day.

Still, the report shouldn't be ignored, as it reflects inflation dynamics in April, when the "big tariffs" were already in effect. Contrary to fears from some analysts, an inflationary shock did not materialize, at least not in April. Many economists believe the impact of Trump's tariffs will be felt later, likely in May or even June–July. Judging by the market's subdued reaction to the CPI, this view currently dominates.

Here's a summary of the data: the headline Consumer Price Index came in at 2.3% YoY in April, down from 2.4% in March and below market expectations. The trend is what matters: CPI has steadily declined for three consecutive months. For comparison, in January, the index was 3.0%, and now it's just steps away from the Fed's target.

The core inflation index proved more stubborn. Core CPI (excluding food and energy) held steady at 2.8% YoY, exactly as expected.

The report also showed that food prices rose slightly slower than in March (2.8% vs. 3.0%). Transportation services also saw slower growth (2.5% vs. 3.1%). Energy prices dropped 3.7% in April (with gasoline prices down nearly 12% after a 9.8% drop in March). New car prices rose by 0.3%, and used car prices increased by 1.5%.

What Does This Mean?

If the U.S. had not initiated this tariff war, the CPI report might have been enough to bring forward expectations for another Fed rate cut. However, as noted, the prevailing view is that the negative effects of the tariffs will appear later, likely this summer, assuming they remain in place.

Yes, the U.S. and China agreed to reduce tariffs by 115%, but a 30% U.S. tariff on Chinese goods is still in effect, continuing to weigh on the economy. The agreement also does not include sectoral tariffs introduced by Trump in March or those from his first term. Moreover, European exports to the U.S. are still subject to 10% duties—except for autos, aluminum, steel, and their derivatives, which are taxed at 25%. Even the (de facto, not de jure) trade deal with the UK did not eliminate tariffs—10% remains in place.

As such, market concerns about rising U.S. inflation over the coming months are justified, which explains the lukewarm market reaction to the CPI report.

Outlook for EUR/USD

To resume a steady downward move, EUR/USD bears need a fresh catalyst, such as new details about the upcoming U.S.-China negotiations (timelines, agenda, etc.). Currently, the market is in an information vacuum; while both sides have agreed to continue discussions, no further details have been released. The fact that talks have begun was already priced in, but EUR/USD needs new news to sustain the southern trend. The lack of information pressures the dollar, allowing buyers to mount a correction back into the 1.11 zone.

Selling EUR/USD is only advisable if bears break through the 1.1120 support level (the lower Bollinger Band on the daily chart) and, more importantly, consolidate below it (i.e., enter the 1.10 range). In that case, the next bearish targets will be 1.1050 (lower BB on H4) and 1.0920 (upper Kumo cloud boundary on D1).

If negotiations stall and disagreements over details arise, interest in the dollar may decline as fears of stagflation in the U.S. come back into focus. Thus, if bears fail to breach 1.1120 in the short term, it may be wise to consider long positions with a first target at 1.1230, where Tenkan-sen and Kijun-sen lines converge on the daily chart.