U.S. inflation undershoots expectationsGerman business survey improvesEURUSD touches 1.08 for the first time in two months

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The Euro to Dollar exchange rate rallied to fresh two-month highs following the release of U.S. inflation data for October and an improved German sentiment figure.

Euro-Dollar touched 1.08 as it rose sharply following the release of data showing headline U.S. CPI inflation rose 3.2% in the year to October, which was less than the 3.3% figure the market was expecting and represented a sharp slowdown on September's 3.7% reading.

CPI inflation was flat on a month-on-month basis, down on September's energy-infused 0.4% advance and below expectations for 0.1%, boosting a narrative that the Federal Reserve has done enough to bring inflation back to the 2.0% target.

Money market pricing reveals investors now assign less than a 10% chance the Fed will raise interest rates beyond the existing 5.25%-5.50% range. The odds of a further hike by January were as high as 28% ahead of the inflation release, and the market now fully prices the first Fed cut for the June 24 meeting.

Above: EURUSD at one-hour intervals showing the sizeable reaction to U.S. inflation numbers. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

The all-important core CPI inflation figure stood at 4.0% year-on-year in October, below expectations for an unchanged reading of 4.1% from September. Month-on-month core read at 0.2%, down on September's 0.3%, which is also what the market was looking for.

While core inflation - which strips out variables and gives a better understanding of domestic inflationary trends - is still elevated, it nevertheless appears to be ticking lower.

As a result, market bets for a further Federal Reserve rate hike promptly retreated, and investors brought forward expectations for the timing of a first potential rate cut.

U.S. bond yields fell in reaction, boosting demand for equities and diminishing demand for the Dollar.

Heading into the U.S. inflation numbers, the Euro was already an outperformer, courtesy of better-than-expected economic figures from Germany.

"The EUR/USD and all other major euro crosses rose this morning, finding support from slightly stronger Eurozone data and the overall positive risk tone across financial markets we have seen in recent days," says Fawad Razaqzada, an analyst at City Index.

German ZEW survey current conditions -79.8 vs -76.9 expected and -79.9 lastGerman ZEW Economic Sentiment +9.8 vs +5.0 expected, rises from -1.1 last in its first positive reading since April.Eurozone ZEW Economic Sentiment 13.8 vs. 6.1 expected and 2.3 last."While investors’ assessment of the current situation remained at extremely poor levels, they have nevertheless turned optimistic about the outlook for the German economy. This is what the latest ZEW survey pointed out, which is based on about 300 German institution investors and analysts. They also grew more optimistic about the Eurozone’s outlook than the month before," says Razaqzada.

Euro-Dollar has gained over recent weeks as investor sentiment towards the Eurozone economy - and particularly that of Germany - reaches a nadir.

With expectations having been so low, even the slightest improvement in the data can boost Eurozone bond yields and the Euro.