US dollar poised for volatility as inflation data and trade developments loom

Today’s release of the US Consumer Price Index could well provide the impetus for the dollar index to move decisively above the 98 mark, provided figures align with expectations. The Federal Reserve has recently returned to a more hawkish stance after briefly adopting a softer tone. Should inflation rise to 0.3% from the previous reading of 0.1%, as many analysts anticipate, it is likely to intensify concerns over tariff-driven price pressures and reinforce this more aggressive policy outlook.

Another key factor likely to sway the dollar index this week is Thursday’s retail sales figures. Market participants are placing considerable weight on any disappointing outcomes, as concrete evidence of a slowdown in economic activity could support a more cautious view of the US growth trajectory, moving beyond mere sentiment.

Turning to international trade, further threats and perhaps initial agreements are anticipated over the coming days. Even so, such declarations have so far had a limited effect on the dollar index and its constituent currencies, as traders increasingly interpret them as tactics within a broader bargaining framework rather than signals of immediate policy action.

Nevertheless, it is worth noting that while the impact of these threats has diminished over time, the unpredictability of the US administration has not subsided. President Trump may draw confidence from the robustness of the domestic economy, particularly with the S&P 500 reaching fresh record highs in spite of persistent uncertainty. This resilience could encourage an even more expansive approach to proposed tariffs.

Looking ahead to the 1 August deadline, the introduction of further tariffs would probably trigger a return to earlier patterns, notably a weakening of the dollar and renewed strength in the euro. Should the escalation coincide with clear evidence that tariffs are beginning to weigh on US economic performance, markets are almost certain to react with more pronounced sell-offs, driving the dollar lower in a more sustained manner.

Euro steady as EU strengthens global trade ties

With little fresh economic data from Europe or the United States yesterday, focus shifted to the European Commission’s move to build closer ties with countries such as Canada and Japan, both affected by US tariffs.

These more assertive discussions highlight widespread frustration with the trade dispute and reflect a cautious readiness to act if threats become policy.

At the weekend, the EU secured a tentative economic deal with Indonesia, which faces a 32% US tariff despite efforts to ease it. Indonesian President Prabowo Subianto described the agreement as a breakthrough after ten years of negotiations, signalling his intention to return to Brussels to formalise the pact, known as the Comprehensive Economic Partnership Agreement.

The revived trade tensions appear to have been the catalyst that brought both parties back to the table.

Later, European Commission President Ursula von der Leyen held talks with Canada’s Prime Minister Mark Carney, seen as part of a broader strategy to reduce Europe’s reliance on US markets.

Even so, these developments did not spark much movement in currency markets. EUR/USD has remained below $1.17 in recent days. If upcoming US inflation figures fall short of expectations, this resistance could soon give way.

Recently, the euro-dollar rate has edged down around 0.9%. The threat of new 30% tariffs failed to trigger a sharper fall, partly because markets have become less sensitive to such warnings. Earlier threats were steeper, with proposals of 50% tariffs in May.

Interest rate expectations have also moderated, with swaps pricing a high chance of a cut today, down from certainty earlier in July. Meanwhile, volatility has risen mainly in the one-month horizon, reflecting concern about the next tariff deadline, but remains low further out, suggesting that many risks are already priced in.

Sterling under strain as rate cut fears grow

Although the pound’s strong advance against the dollar has begun to falter, with the exchange rate falling to a fresh three-week low of $1.3422 during the Tokyo session, it is against the euro that sterling’s weakness is most pronounced. The euro, which has gained significantly from the dollar’s broad retreat in 2025, has pushed the pound down more than 4.5% since the start of the year. Earlier today in Asian trading, the pair slipped to $1.1499, the lowest level seen in three months.

Selling pressure on sterling has intensified as investors grow concerned that UK interest rates may be lowered more swiftly than previously thought. This view has gained traction following signs that the labour market is losing momentum and economic growth remains subdued. Bank of England Governor Andrew Bailey stated in an interview with The Times that if employment conditions deteriorate too quickly, the central bank would be prepared to consider more substantial rate reductions. At present, markets are pricing in a 50-basis-point cut by the end of the year.

All eyes are now on Thursday’s employment figures. Should the data fall short of expectations, it would reinforce the belief that policy easing is imminent and could drive the pound even lower. In that scenario, GBP/USD might approach its low from 23 June at 1.3371, which was the weakest point in the past month.