Sterling and the euro gained against the dollar during today early trading after U.S. inflation data for July came in without major surprises, prompting markets to reassess expectations for the Federal Reserve’s September meeting. GBP/USD rose 0.21% to 1.3534, while EUR/USD advanced 0.12% to 1.1557. The move followed a 0.1% monthly increase in the Consumer Price Index, while annual inflation slowed to 3.4%. Core inflation rose 0.2% on the month and 2.5% from a year earlier, with all readings matching market forecasts. The figures gave the Fed little immediate reason to resume raising interest rates, particularly after the weak employment report, pushing the probability of unchanged rates in September to 62% from 54% before the CPI release.
The dollar initially weakened as expectations for tighter monetary policy eased, but the decline proved short lived. The Dollar Index fell to 99.61 following the inflation release before recovering to 99.98, up 0.2% on the session. The rebound reflected continued demand for the U.S. currency as geopolitical risks remained elevated. The 99.40 to 100 range continues to dominate the index, while a more pronounced decline would likely require weaker U.S. economic data or a clearer shift in Federal Reserve policy. Investors are now focused on producer price data, upcoming labor market figures and the Jackson Hole symposium for additional guidance ahead of the September meeting.
Sterling’s advance was largely driven by dollar weakness rather than developments within the UK economy. With no major British economic releases or monetary policy signals providing a fresh catalyst, the pound remains sensitive to global risk appetite and changes in U.S. interest rate expectations. As sterling is generally viewed as a currency closely linked to the economic cycle, a sustained decline in the dollar could provide further support, while another rise in U.S. Treasury yields could quickly put pressure on the pound.
The euro showed a more restrained performance despite recent eurozone economic indicators generally exceeding expectations. High energy costs remain a key challenge for the single currency, with European natural gas prices staying above €60 per megawatt hour as tensions in the Gulf continue. The 1.1580 area remains an important level for EUR/USD. A sustained move above it would likely require either a clearer shift toward a less restrictive Federal Reserve policy or a meaningful decline in geopolitical risks affecting global energy markets.
Middle East developments also remain an important factor for both currency and energy markets. Brent crude briefly approached $90 a barrel as negotiations over reopening the Strait of Hormuz showed little meaningful progress and disagreements between Washington and Tehran persisted. A prolonged rise in oil prices could revive inflation concerns and complicate the Federal Reserve’s policy outlook, helping explain why the dollar was able to recover despite relatively soft inflation figures.
The Japanese yen, meanwhile, continued to surrender some of the gains recorded following the joint intervention by Tokyo and Washington, with USD/JPY rising to 159.46. Although Japanese business confidence improved on strong semiconductor demand and resilient domestic consumption, the yield gap between the United States and Japan continued to weigh on the yen. Overall, currency markets remain focused on three main drivers: the direction of U.S. inflation, expectations for Federal Reserve interest rates and developments in energy markets and the Strait of Hormuz.
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