USD

The dollar index (DXY) climbed modestly yesterday before slipping back after the inflation release confirmed expectations of a Federal Reserve rate cut next week. The consumer price index was not particularly weak, yet it showed areas of persistent cost pressure. Markets, however, appear ready to treat stable inflation figures as good enough in a climate already braced for tariff-driven price rises this summer.

Core inflation rose by 0.3% in line with forecasts, led by higher airfares, second-hand car prices, and housing costs. Goods most exposed to tariffs, once cars were excluded, increased by only 0.1% on the month. Weekly jobless claims reinforced the case for easier policy, reaching 263,000, their highest since October 2021.

Even so, the dollar’s fall was measured. Traders have already priced in near-term cuts, and it may take an especially dovish statement from Chair Powell next week to push the currency significantly lower.

GBP

Sterling retreated against both the euro and the dollar after the ONS reported no growth in July, with stronger services and construction offset by weaker production. The flat figure followed a 0.4% rise in June and took quarterly growth down to 0.2% compared with 0.3% previously, the softest run rate in six months.

The ONS emphasised that volatility in monthly readings makes the three-month series a more reliable measure, which it plans to prioritise in future updates. The news saw GBP/EUR fall to 1.1550 and GBP/USD to 1.3550. Slowing momentum complicates the Chancellor’s preparations for the November budget, where official forecasts will be key in shaping the fiscal outlook and potential tax decisions.

Despite this backdrop, sterling still finds some support from higher short-term yields and the Bank of England’s hawkish stance. These factors have allowed it to hold ground against lower-yielding peers, although long-term gilt pressures and slowing economic momentum remain significant headwinds.

EUR

The euro strengthened after the ECB meeting, where President Lagarde struck a more confident tone. Rates were left unchanged as expected, but upward revisions to 2025 growth and inflation forecasts boosted sentiment. Lagarde underlined that trade uncertainty had eased and stressed the unanimous nature of the decision to hold policy steady.

Her comments, including the view that “the deflationary trend is over,” reduced the likelihood of another cut this year. The euro recovered firmly into the 1.17 region, a level that had been difficult to sustain earlier in the week. Still, further gains appear more dependent on developments in the dollar than fresh ECB shifts.

Looking ahead

The dollar’s path hinges on next week’s Fed meeting, where the tone of Powell’s statement could prove decisive. In the UK, markets will watch incoming labour market and inflation reports in the run-up to the BoE meeting, with the vote split set to attract attention. For the euro, sentiment surveys and industrial production figures will be key short-term drivers, but the broader narrative remains shaped by US policy rather than ECB action.