Dollar Holds Steady as Markets Await Federal Reserve Decision

US Dollar (USD)

The US dollar index (DXY) saw a modest rise yesterday before easing back after US inflation data largely confirmed expectations of an imminent Federal Reserve interest rate cut next week. While the consumer price index did not signal a sharp slowdown, it highlighted pockets of persistent price pressure.

Markets, however, appear comfortable treating steady inflation as sufficient grounds for easier policy, especially in a climate already braced for tariff-driven price rises this summer.

Core inflation advanced 0.3% month-on-month, in line with forecasts, fuelled by higher airfares, second-hand car prices, and housing costs. Excluding vehicles, tariff-sensitive goods rose just 0.1%. Meanwhile, weekly jobless claims reached 263,000 – the highest since October 2021 – reinforcing the case for looser monetary policy.

Despite these signals, the dollar’s decline was measured. Investors have already priced in near-term rate cuts, meaning it may take a particularly dovish statement from Fed Chair Jerome Powell next week to drive the currency materially lower.

Pound Sterling (GBP)

Sterling slipped against both the euro and the dollar after the Office for National Statistics (ONS) reported flat GDP growth for July. Stronger services and construction were offset by weaker industrial production, leaving no net expansion.

The figure followed June’s 0.4% rise, dragging quarterly growth down to 0.2% from 0.3% previously – the slowest pace in six months. The ONS stressed that monthly data can be volatile and will increasingly prioritise three-month averages for a clearer picture.

The release saw GBP/EUR retreat to 1.1550 and GBP/USD dip to 1.3550. The slowdown complicates the Chancellor’s preparations for November’s budget, where updated forecasts will shape fiscal plans and potential tax policies.

Even so, sterling retains some support from higher short-term yields and the Bank of England’s hawkish stance. These factors have helped the pound hold its ground against lower-yielding peers, though softer growth and gilt market pressures remain notable headwinds.

Euro (EUR)

The euro gained ground following the latest European Central Bank meeting, where President Christine Lagarde struck a more upbeat tone. As expected, rates were left unchanged, but upward revisions to 2025 growth and inflation forecasts lifted sentiment.

Lagarde emphasised that trade uncertainties had eased and highlighted the unanimous decision to keep policy steady. Her assertion that “the deflationary trend is over” reduced market expectations for further cuts this year.

The single currency recovered firmly into the 1.17 region – a level that proved difficult to sustain earlier in the week. However, future gains are likely to depend more on US dollar movements than additional ECB policy shifts.

Outlook

The dollar’s near-term direction now hinges on next week’s Fed meeting, with Powell’s statement expected to set the tone for global FX markets.

In the UK, investors will focus on upcoming labour market and inflation reports ahead of the Bank of England’s policy meeting, where the vote split could prove pivotal. For the eurozone, sentiment surveys and industrial production figures will drive short-term moves, though the broader narrative remains firmly anchored to US policy developments.

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