US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the third consecutive day as traders await the key central bank decisions, including those from the Federal Open Market Committee (FOMC). That said, the aforementioned inflation cursor dropped to the lowest levels since late July, to 2.34%by the end of Monday’s North American trading session.

More importantly, the 5-year breakeven inflation rate per the FRED data dropped to the lowest levels since September 2021, at 2.44% at the latest. The same raised concerns about the market’s surprise reaction to the hawkish Fed bets.

Given the slump in the US inflation expectations, the fears of a short squeeze in the EUR/USD gain major attention and help the EUR/USD prices to remain firmer. “If Fed rhetoric after Wednesday's meeting were to reinforce signals from swaps and consumers, U.S. rates and the dollar should weaken, which would likely drive a big EUR/USD short squeeze,” said Reuters.

Also read: EUR/USD steadies above parity as traders await ECB’s Lagarde, Fed