EUR/USD at 1.1650: The Inflation Anchor vs. Geopolitical Counterweight

The primary macro driver for the U.S. dollar is now clear: inflation has yet to peak. The latest data from the Producer Price Index (PPI) for November shows the annual rate at 3.0%, the highest in over a year. More importantly, the core PPI, which strips out volatile food and energy prices, also rose to 3% annually. This marks a significant uptick from the 2.8% annual rate seen in October and suggests price pressures in the economy's supply chain are accelerating, not cooling.

This development is a direct counterweight to the narrative of a softening economy. It implies that businesses are still grappling with elevated input costs, potentially absorbing some of these burdens themselves rather than immediately passing them to consumers. As economist Samuel Tombs noted, retailers are shielding consumers from further big increases in goods prices triggered by tariffs. This dynamic creates a structural floor for inflation, increasing the risk that the Federal Reserve will need to maintain higher interest rates for longer than markets currently anticipate.

For the dollar, this is supportive. The Fed's mandate is to bring inflation back to its 2% target, and persistent wholesale price gains like these make a delayed or shallower rate-cut cycle more likely. The market's forward view, which has priced in a series of cuts, now faces a material risk of being wrong. This divergence between the market's expectation and the underlying inflation data provides a fundamental anchor for the dollar at current levels.

Viewed through this lens, the EUR/USD rate of 1.1650 is not just a technical level but a reflection of this macro tug-of-war. It represents the market's current valuation of the U.S. economy's resilience against geopolitical and trade headwinds, with inflation serving as the new, higher baseline.

Geopolitical Risk: The Counterweight That's Not Yet Strong Enough

Geopolitical tensions are a cited reason for the consolidation in EUR/USD, but they are not yet a decisive directional force. The market mood is described as risk-off, driven by tensions in the Middle East, which has kept traders on the sidelines and capped moves in the pair. This aligns with a historical pattern where such conflicts trigger a flight to safety, favoring currencies like the U.S. dollar through a process of mean reversion.

Yet the dollar's response has been muted. Despite the risk-off backdrop, the U.S. Dollar Index is down slightly, and EUR/USD remains flat for two straight days. This suggests that the inflation anchor is a stronger, more immediate force than the geopolitical counterweight. The market is effectively weighing two competing narratives: the persistent threat of conflict versus the more concrete, data-driven pressure from elevated wholesale prices.

The technical picture reinforces this stalemate. EUR/USD is caught in a multi-week downtrend, trading within a defined range. The immediate focus is on a potential range break that could signal the next move. For now, the geopolitical risk is providing a floor for dollar demand, but it is not powerful enough to break the pair out of its consolidation. The setup is one of tension, not resolution.

The New Rules of the Game: Strategic Implications for Currency Positioning

The current range-bound action in EUR/USD is not a sign of equilibrium, but a pause within a longer-term trend. The structural forces reshaping the global economy are creating a more multipolar and volatile environment, one that is fundamentally challenging the dollar's historical dominance. As RaboResearch notes, the outlook for 2026 is defined by new rules in trade and investment, with the US leveraging its power to reshape the playing field and China aiming for technological supremacy. This is a strategic game, not just an economic one.

In this new environment, traditional economic logic is yielding to geopolitical calculus. The US is embedding economic statecraft into its policy, using tariffs, subsidies, and investment mandates as tools to secure its position. The result is a world where access to markets is increasingly conditional on alignment. This dynamic is prompting a tangible shift in how capital is managed. As the article highlights, investors are diversifying currencies where possible and hedging dollar positions more frequently than before. The dollar is no longer seen as an untouchable safe haven; it is a currency subject to political pressure and strategic recalibration.

For the euro, this creates a subtle but important counterbalance. While the eurozone faces a temporary slowdown, the broader trend is toward a modest increase in the EUR/USD rate over the coming year. This reflects a market that is gradually adjusting to the new rules. The euro is not a direct challenger to the dollar's liquidity, but it is becoming a more prominent part of a diversified portfolio in a world where no single currency can be assumed to be the default.

The bottom line is that the current consolidation at 1.1650 is a tactical pause. The longer-term trajectory is one of modest dollar weakness, driven by a combination of US cyclical pressures and a global repositioning away from dollar-centric strategies. The geopolitical counterweight, while not strong enough to break the pair out of its range today, is the force that will eventually tilt the scales. The market is waiting for the next signal that the new rules of the game have fully taken hold.

Catalysts and Scenarios: What Could Break the Stalemate

The current stalemate in EUR/USD is a function of two powerful but offsetting forces. The path forward will be determined by which catalyst gains the upper hand. The immediate test arrives on January 30 with the release of the December Producer Price Index report. This data point is critical because it will confirm whether the inflation picked up speed in November is a durable trend or a temporary spike. A follow-through with another monthly increase would solidify the inflation anchor, likely reinforcing the dollar's support and keeping the pair range-bound. A sharp deceleration, however, could break the narrative and trigger a swift re-pricing of Fed policy expectations, providing a near-term catalyst for a move higher in the euro.

Looking beyond the next few weeks, the longer-term outlook for EUR/USD is modestly positive. Forecasts point to a rise to 1.18 over the next 12 months. This trajectory is driven by a combination of US cyclical pressures and political dynamics. The US faces stagflationary pressures from tariffs, which could slow growth and eventually force the Federal Reserve to cut rates more aggressively than anticipated. Political pressure on the Fed to act could accelerate this process, weighing on the dollar. At the same time, the eurozone is expected to slow temporarily but recover later in 2026, providing a relative floor for the single currency.

The most significant risk to this outlook is a sharper-than-expected escalation in geopolitical conflicts. The market's current risk-off mood is a fragile equilibrium. As noted in past analysis, major European wars have triggered mean reversion in currency markets, favoring traditional safe havens like the dollar. A new, severe escalation could quickly overwhelm the inflation narrative, triggering a stronger dollar safe-haven move that would break the pair out of its consolidation. This would be a classic geopolitical counterweight in full force.

The bottom line is that the stalemate is not permanent. The inflation data from January 30 is the first major catalyst. If it confirms the uptrend, the dollar's structural floor holds. If it breaks, the market's focus shifts to the longer-term US cyclical downturn. The geopolitical risk remains a live wire, capable of disrupting any scenario at short notice. For now, the setup is one of tension, waiting for the next signal to tip the balance.