Dollar Weakens as Inflation Pressures Ease

USD
The US dollar edged lower after fresh producer price data revealed the first monthly decline since April, reinforcing confidence that inflationary pressures are cooling. Wall Street rallied to fresh highs, while two-year Treasury yields – typically most sensitive to near-term Federal Reserve decisions – slipped. Markets are now firmly positioned for three interest rate cuts in 2025, with debate focused on how quickly and aggressively policymakers will move.

August’s Producer Price Index (PPI) fell by 0.1% month-on-month, with July revised lower. On an annual basis, prices rose 2.6% – still elevated but less concerning than anticipated. While services costs have softened, goods inflation remains stubbornly high. This mixed backdrop highlights a balancing act: tariff pass-through effects appear contained, yet weaker domestic demand may be starting to emerge.

Attention now turns to today’s US Consumer Price Index (CPI) release, which will be pivotal in shaping short-term dollar moves. Survey data suggests price stickiness could linger, but softer labour market signals and downward revisions strengthen the case for policy easing. Should dovish momentum accelerate, the dollar index risks sliding beneath a key technical support level.

GBP
Sterling has been buoyed by broader market sentiment, drawing support from expectations of US monetary easing. Recent UK gilt auctions have been well absorbed, easing concerns over rising borrowing costs. GBP/USD rebounded from lows near 1.3333, briefly testing 1.36 before retreating. Higher oil prices and geopolitical tensions capped further upside, though softer US figures allowed the pound to consolidate above 1.35.

Technically, sterling sits in neutral territory, with speculative positioning showing a build-up of bearish bets that could weigh on the currency if they materialise. Despite some short-term resilience, the UK’s domestic outlook remains fragile. Subdued growth, persistent inflation and fiscal concerns undermine sterling’s longer-term appeal, even with its relative yield advantage. This tension is evident in GBP/EUR, which remains stuck below €1.16 and well down year-to-date, despite hints of a firmer Bank of England stance.

EUR
The euro has struggled for traction, with weaker US producer price data failing to lift EUR/USD meaningfully. Markets have already fully priced in a Federal Reserve cut, and without a clear case for a larger 50-basis-point move, there is little scope for additional dovish expectations to support the single currency. The upcoming ECB meeting is widely expected to pass without major surprises.

Geopolitical risks have also weighed on sentiment, with reports of an Israeli strike on Doha and Poland intercepting drones near its border with Belarus. These developments, which are pushing oil prices higher, have curbed euro upside given the bloc’s reliance on energy imports. EUR/USD has managed to stay above 1.07 – now a key support level – but lacks strong catalysts to push materially higher in the near term.

Looking Ahead
All eyes are now on US CPI data, which will play a decisive role in shaping expectations for the Federal Reserve’s next moves. For sterling, global risk appetite and energy market dynamics remain key drivers, though domestic structural challenges continue to cap gains. The euro faces a difficult backdrop of sluggish growth and heavy energy exposure, leaving it reliant on external shocks and US policy direction for momentum.

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