Sterling and the euro gained against the U.S. dollar on Wednesday after inflation data matched expectations, reinforcing market expectations that the Federal Reserve may keep interest rates unchanged in September. Currency markets reacted to softer inflation pressure and shifting expectations around future Fed policy.
Dollar Weakens After CPI Data
The U.S. dollar declined after July consumer inflation data came in line with forecasts, reducing pressure on the Federal Reserve to raise interest rates immediately.
U.S. consumer prices increased 0.1% in July on a seasonally adjusted basis, matching expectations after falling 0.4% in June. The annual inflation rate eased to 3.4% from 3.5%.
Core CPI, which excludes food and energy costs, increased 0.2% during the month and 2.5% year over year, also matching forecasts.
Sterling and Euro Gain Against Dollar
GBP/USD rose 0.21% to 1.3534, while EUR/USD gained 0.12% to 1.1557 following the inflation release.
Sterling’s move was mainly driven by dollar weakness rather than new developments in the U.K. economy, with the pound continuing to trade as a risk-sensitive currency.
The euro also benefited from dollar softness, although gains remained limited by ongoing energy market concerns linked to tensions in the Middle East.
Markets Reassess Fed Rate Expectations
Markets are now pricing roughly equal odds of a Federal Reserve rate increase at the September 17–18 meeting.
Traders will continue watching upcoming employment data and the Jackson Hole symposium for additional signals before policymakers make their next decision.
ING analysts said a softer inflation reading could weaken the dollar further, particularly against currencies that benefit from stronger risk appetite.
Energy Risks Continue to Pressure Euro
Despite improving economic data from the eurozone, the euro has faced pressure from elevated energy prices.
European natural gas prices remain above €60 per megawatt-hour as markets monitor unresolved tensions in the Gulf region.
Diplomatic efforts involving Pakistan and Oman to mediate between Washington and Tehran have provided some relief, but no agreement has been reached.
Dollar Outlook Depends on Fed and Global Risks
The U.S. dollar index remains within a narrow trading range, with traders looking for a stronger signal before positioning for a larger move.
Potential U.S. tax policy changes, including reports of possible capital gains tax cuts, could support risk appetite and weigh slightly on the dollar. However, analysts warned that unfunded tax cuts could push Treasury yields higher and potentially encourage tighter monetary policy.
According to ING, EUR/USD could challenge recent highs near 1.1580 if inflation data continues to support expectations of a softer Fed stance.
