Markets React as Steady US Inflation Fuels Rate Cut Bets

USD – Dollar Eases on Softer Inflation Outlook

US inflation figures for July aligned closely with expectations, with headline CPI rising 0.2% month-on-month and core CPI advancing 0.3%. The upward pressure was driven largely by the services sector — particularly shelter costs, airfares, and leisure activities — while goods inflation showed signs of cooling. Household furnishings slowed to a 0.4% increase, apparel prices edged up just 0.1%, and video/audio equipment prices remained unchanged.

The slightly softer tone compared with market fears saw two-year US Treasury yields fall by 4 basis points to 3.73%, while expectations for a Federal Reserve rate cut in September climbed to 90%. The dollar slipped by around 0.4% in response. Upcoming US retail sales figures will provide a key gauge of consumer resilience, while later releases of PPI and PCE data this month could reinforce the case for monetary easing. However, recent tariff increases may yet place upward pressure on inflation, particularly as the labour market continues to lose momentum.

GBP – Sterling Strengthens on Labour Data Beat

Sterling gained ground after UK payroll losses proved smaller than anticipated, lending support to the Bank of England’s hawkish stance despite its recent interest rate reduction. The pound briefly touched 1.16 against the euro before easing back, with upside likely limited unless Thursday’s GDP figures deliver a notable positive surprise.

Against the US dollar, the pound advanced over 0.6%, breaking through 1.3450 and now consolidating near the 1.35 mark, with 1.36 emerging as the next upside target. UK GDP and industrial production data will be the key drivers of sterling’s short-term trajectory.

EUR – Euro Supported by Dollar Weakness

The euro climbed to a two-week high against the greenback as the softer US inflation report bolstered expectations of a more dovish Federal Reserve. The European Central Bank is widely expected to hold rates steady, following recent remarks from President Christine Lagarde signalling no imminent policy shift.

Nevertheless, the latest German ZEW survey indicated waning investor confidence. Further declines in the Ifo Business Climate Index or PMI data would likely be needed to sway ECB policy in a more dovish direction. For now, euro gains are being fuelled largely by US dollar weakness, with EUR/USD trading above its 50-day moving average and technical momentum indicators pointing higher.

Market Outlook – All Eyes on Key Economic Data

Looking ahead, US retail sales, PPI, and PCE figures will shape expectations for the Fed’s September decision. In the UK, GDP and industrial output numbers will set the tone for sterling, while eurozone sentiment indicators could influence the ECB’s outlook. With the dollar currently on the defensive, both the euro and the pound maintain a near-term advantage in the forex markets.

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