USD

The dollar drifted lower after the latest US producer price data showed the first monthly decline since April, offering reassurance that inflationary pressures are cooling. Equity markets pushed to new highs while two-year Treasury yields, highly sensitive to near-term Fed policy, slipped. Markets are now firmly positioned for three rate cuts in 2025, with the main debate centred on the scale and speed of easing.

August’s PPI fell 0.1% on the month, with July revised down. The year-on-year increase of 2.6% was still elevated but less troubling than expected. Services costs softened, although goods inflation remains near its highs. This mixed picture raises questions: on one hand, tariff pass-through appears contained; on the other, weaker domestic demand may be emerging. Today’s CPI release is likely to shape near-term moves. While survey data suggests price stickiness could persist, softer labour data and recent revisions have strengthened the case for cuts. Against this backdrop, the dollar index risks slipping below an important support line if dovish momentum builds.

GBP

Sterling has tracked global sentiment, gaining support from expectations of US easing. The UK’s debt sales have been well received, easing concerns around funding costs. GBP/USD climbed back from lows near 1.3333, briefly challenging 1.36 before retreating. Higher oil prices and geopolitical strains dampened the move, but softer US data allowed the pound to stabilise above 1.35. Technical readings are neutral, with speculative positioning showing a build-up of bearish bets that could weigh on the currency if realised.

Despite this, the UK’s underlying economic picture remains fragile. Weak growth, persistent inflation and fiscal doubts limit sterling’s appeal even with its yield advantage. This tension is reflected in GBP/EUR, which remains below €1.16 and significantly lower year-to-date despite signs of a firmer Bank of England stance.

EUR

The euro has been restrained, with yesterday’s weaker US producer price numbers failing to lift EUR/USD. A Fed cut is already fully factored in, and without justification for a larger 50-point move, there is little room for more dovish pricing to buoy the single currency. The upcoming ECB meeting is expected to pass without major surprises.

Geopolitical events have also weighed, including reports of an Israeli strike on Doha and Poland’s interception of drones near its border with Belarus. These risks, channelling through higher oil prices, have curtailed upside potential for the euro, which remains vulnerable as a net importer of energy. EUR/USD has managed to hold above 1.07, which is now an important support level, though it lacks catalysts to push significantly higher in the short term.

Looking ahead

Market focus now shifts to US CPI, which will be crucial for confirming the Fed’s policy path. For sterling, global risk appetite and energy developments remain key drivers, while structural weaknesses at home continue to limit gains. The euro faces the twin challenges of subdued growth and energy exposure, leaving it dependent on external shocks and US policy direction for momentum.