The U.S. Consumer Price Index delivered a mixed but largely in-line reading for July 2025, with headline inflation holding steady at 2.7% year-on-year while core CPI ticked up to 3.1%.

The data supported the idea of limited tariff pass-through to consumer prices, providing the Fed room to focus on labor market weakness and cementing September rate cut expectations.

Let’s examine which pairs from our watchlist capitalized on this environment of dollar weakness and renewed easing optimism:

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The Setup

• What We Were Watching: U.S. CPI Report for July 2025

• The Expectation: Headline CPI to rise to 2.8% y/y from 2.7%, core CPI to increase to 3.0% y/y from 2.8%, with markets watching for signs of tariff-driven inflation

• Data outcome: Headline CPI held at 2.7% y/y (vs 2.8% expected), core CPI rose to 3.1% y/y (vs 3.0% expected), limited tariff impact on goods prices

• Market environment surrounding the event: Dollar under pressure from weak jobs data and dovish Fed rhetoric, markets pricing 85%+ odds of September rate cut, and tariff uncertainty

Event Outcome

The July U.S. inflation report delivered a market-friendly outcome despite mixed headline numbers. While core inflation accelerated to its highest pace since January, the broader narrative focused on the limited impact of tariffs on consumer prices and the Fed’s room to ease policy.

Key points from the U.S. CPI report:

• Tariff impact contained: Despite widespread concerns about trade policy effects, corporations continued absorbing most tariff costs rather than passing them to consumers
• Services inflation persistent: Airfare surged 4.0% month-on-month while medical care costs rose 0.7%, showing underlying price pressures in services
• Goods deflation helped: Energy prices declined 1.1% month-on-month, providing disinflationary pressure to offset services gains
• Housing moderation continued: Shelter costs rose just 0.2% for a second consecutive month, showing encouraging cooling in the largest CPI component
• Mixed tariff-exposed sectors: Appliances surprisingly fell 0.9% while new vehicle prices remained flat despite significant tariff exposure

The data painted a picture of an economy where businesses were successfully absorbing import cost pressures while underlying inflation dynamics remained manageable, giving the Federal Reserve justification to prioritize employment concerns over price stability in the near term.

Fundamental Bias Triggered: Dollar weakness across major pairs

Broad Market and Exogenous Drivers:

Markets entered the CPI release with the dollar already under significant pressure following the previous week’s employment disaster that showed just 73,000 jobs added versus 100,000 expected. Fed officials including Kashkari and Daly had opened the door wide for September cuts, with markets pricing aggressive easing expectations.

The backdrop featured Trump’s escalating tariff threats across multiple fronts – China facing potential higher levies as the 90-day truce deadline approached, Switzerland hit with 39% tariffs, and semiconductor/pharmaceutical sectors in the crosshairs. This created a complex environment where “bad news was good news” for rate cut hopes, while trade uncertainty added volatility.

Treasury Secretary Scott Bessent’s subsequent comments advocating for a 50 basis-point September cut intensified the dovish momentum, while Trump’s hints about naming Powell’s successor “early” added policy uncertainty that further weighed on the dollar.

The risk environment shifted from cautious optimism on trade deal progress to renewed concerns about escalating global trade tensions, making currency movements particularly sensitive to any signs that the Fed would have room to ease aggressively.

Scenario Scorecard: How Did They Play Out?

 GBP/USD: Net Bearish USD Event outcome + Risk-On Scenario = Arguably the best odds of a net positive outcome

GBP/USD 1-hour Forex Chart by TradingView

GBP/USD had been consolidating around the 1.3450 minor psychological level ahead of the CPI release, with the pair forming a series of higher lows along a rising trendline that had held since early August.

The net dovish CPI outcome triggered an immediate breakout above short-term resistance, with Cable rocketing through the 1.3500 handle within minutes of the data release. The initial spike carried the pair all the way to 1.3580 – just shy of the R2 target we’d identified – before some profit-taking set in.

What made this setup particularly beautiful was how the fundamental narrative played out in real-time. As Fed easing odds spiked and Treasury yields collapsed, traders immediately pivoted to the policy divergence theme. The BOE’s relatively hawkish stance from last week suddenly looked even more attractive by comparison, with the two-year yield spread moving decisively in sterling’s favor.

Technical levels held like clockwork too. The rising trendline support around 1.3420 provided the perfect launching pad, while the break above 1.3500 likely triggered technical buy actions, extending the rally into Thursday.

By Friday’s close, GBP/USD had settled comfortably above 1.3550, representing a solid gain for the week and validating the bullish bias setup when both fundamental and technical probabilities aligned.

Not Eligible to move beyond Watchlist – Bullish USD Setups and USD/CHF bearish setup

USD/CHF Net Bearish USD Event outcome + Risk-Off Scenario

USD/CHF 1-hour Forex Chart by TradingView

This setup was invalidated due to the broad risk-on environment that ensued after the US CPI report poured cold water on any idea of the Fed holding off rate cuts in September.  But this was an interesting pair to watch from a technical and momentum standpoint.

Ahead of the CPI event, the pair hit resistance then reversed and slid to the .8024 S1 Pivot Point target after the inflation data reinforced a dovish Fed outlook. It was there that technical buyers and profit takers stepped in, lifting USD/CHF to the discussion area / weekly pivot point, and chopped sideways from there.

This turned out to be a strong candidate for a purely weak USD play regardless of the broad market environment, thanks to the importance and significant reaction of the market to the US CPI event, and traders who played it that way, likely saw a net positive outcome with relatively moderate risk and trade management strategies.

USD/JPY Long: Net Bullish USD Event outcome + Risk-On Scenario 

USD/JPY 1-hour Forex Chart by TradingView

The target event did not favor a bullish USD setup, with traders zoning in on soft headline CPI numbers and what they might mean for a September Fed cut.

USD/JPY, which had been leaning toward a test of range support, instead climbed and broke above the range even before the inflation data dropped. The weaker-than-expected CPI reading firmed up expectations for a September rate cut, pushing Treasury yields lower and giving USD alternatives like the yen a lift.

The pair slid to 146.30, breaking below range support, with the move likely reinforced by Bessent’s remarks favoring a BOJ rate hike. But Thursday’s hotter PPI print pulled back some of the Fed rate cut expectations and helped the dollar rebound, allowing USD/JPY to return to its earlier consolidation.

EUR/USD Short: Bullish USD Event outcome + Risk-Off Scenario 

EUR/USD 1-hour Forex Chart by TradingView

The net bullish dollar scenario didn’t play out for this Watchlist entry, as cooler US CPI added to expectations for a September Fed rate cut and sent the greenback broadly and sharply lower.

EUR/USD didn’t reach the 1.1700 to 1.1750 short entry zone until after the CPI release dragged the dollar lower. Mixed inflation and GDP figures from the Euro Area also failed to give the euro any clear direction midweek.

The pair is still hovering near that entry area, leaving traders who took the setup with an unclear outcome in the days following the report.

The Verdict

The U.S. CPI event delivered exactly the dollar weakness our analysis anticipated, with GBP/USD emerging as the clear standout performer among our watchlist pairs. The combination of in-line consumer price data, limited tariff pass-through, and growing Fed-BOE policy divergence created an ideal environment for Cable bulls.

However, Thursday’s PPI surprise served as a crucial reminder that inflation dynamics remain fluid in the current tariff environment. While immediate consumer price impacts stayed contained, wholesale pressures are building that could complicate the Fed’s easing path ahead.

For traders who executed the GBP/USD long setup with proper risk management, the event provided strong returns. Those who remained flexible enough to adapt to evolving data – particularly around Thursday’s PPI shock – were best positioned to preserve gains in what proved to be a multi-day event sequence rather than a single-release story.

Overall, we’d rate this analysis as “highly likely” in delivering a potentially net positive outcome, given the strong favorable momentum move, and despite the pullback, the market closed the week notably above both the discussion price area and the post event price area.

Key Takeaways:

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