Dollar Steady as Markets Digest Strong US Producer Price Data

USD

The US dollar held firm after stronger-than-expected producer price figures added fresh uncertainty to the Federal Reserve’s policy outlook.

US producer prices surged 0.9% month-on-month in July, well above the forecast of 0.2% and marking the sharpest rise since June 2022. On an annual basis, the Producer Price Index (PPI) accelerated to 3.3% from 2.4%, while the core measure climbed to 3.7% from 2.6%. The sharp increases highlight the inflationary impact of recent tariff measures and reinforce the Fed’s cautious approach to interest rate cuts.

Goods prices advanced 0.7% (0.4% excluding food and energy), while service costs jumped 1.1%, the steepest monthly increase since March 2022. Airfares rose 1%, and portfolio management fees soared 5.8%, underscoring uneven but persistent price pressures. This suggests businesses are either absorbing higher costs and reducing margins or that consumer prices may rise further in the coming months.

While the data complicates the Fed’s decision-making, it may not be sufficient to derail expectations of a modest 25bps rate cut next month. Softer labour market figures still support the case for easing. The dollar index strengthened briefly on the release but remains in a broader downward trend. Traders now look to today’s US retail sales data, which could provide the next key catalyst. A stronger reading may underpin the greenback, while a weaker result could bolster expectations for a September cut.

GBP

The pound sterling has reached one-month highs against the US dollar, euro, Canadian dollar and Australian dollar this week. Solid UK economic data has fuelled speculation that the Bank of England (BoE) may adopt a more hawkish stance, while improved global sentiment has also lifted the currency.

GBP/EUR has pushed back above €1.16, testing its 50-day moving average for the first time since mid-June, with sterling gaining around 2% in three weeks. Interest rate differentials and subdued volatility suggest the pound could be trading nearer €1.18–1.19, but sustained demand for the euro—partly driven by flows out of the US dollar—has limited further advances.

UK wage growth remains close to 5%, and GDP exceeded forecasts, expanding 0.4% in June and 0.3% in Q2. These results have reduced the likelihood of a November rate cut, with markets pricing only a 40% chance, although expectations for a reduction by February remain fully priced in.

For sterling to advance further, it will likely require either diminished eurozone inflows or a decisive hawkish shift from the BoE. Next week’s UK inflation figures will be pivotal, with policymakers looking for a sustained fall in price pressures against a backdrop of stubborn wage growth.

EUR

The euro’s path towards reclaiming early July highs near 1.17 depends heavily on clearer signs of a dovish shift from the Fed. While weaker labour data and a softer CPI reading had boosted rate-cut bets, the latest PPI figures challenge that narrative. Tariff-driven price rises are already feeding through supply chains and could soon impact consumers, complicating the case for aggressive Fed easing.

EUR/USD remains volatile, moving sharply yesterday, but has posted only modest weekly gains of about 0.3%. Near-term euro upside will require consistently weaker US economic data rather than short-lived headlines. With Washington trade policy now viewed as a structural factor, its immediate impact on markets has diminished.

If US retail sales disappoint today, the euro could test 1.17, though sustained gains are unlikely without a steady stream of softer US releases.

Looking Ahead

Markets now turn to US retail sales data, which will shape near-term direction across the US dollar, pound and euro. A stronger-than-expected number could support the dollar and dampen expectations of a September rate cut, while a weak result may fuel further sterling and euro gains.

In the UK, next week’s inflation report will be crucial for the pound, while in the eurozone, traders remain focused on US macro signals as the primary driver for EUR/USD momentum.

Also in focus is today’s landmark summit between President Donald Trump and Russian President Vladimir Putin, taking place at Alaska’s largest military base. The meeting marks Trump’s latest attempt to end the three-and-a-half-year conflict, a long-standing foreign policy objective. Hopes for peace or a ceasefire have already reduced demand for traditional safe-haven currencies such as the Swiss franc and Japanese yen, while boosting interest in the euro. Oil prices eased as well. Should hostilities end, the euro would likely benefit further, supported by improved sentiment and reduced geopolitical uncertainty.

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