USD

The United States and China have agreed to extend their trade pause for another 90 days, meaning tariffs will remain unchanged through November. This decision has been well received by investors, with Asian equity markets rallying and both European and US futures trading higher. The more pressing focus now shifts to today’s US Consumer Price Index release.

Analysts are alert to signs that inflationary pressures may be re-emerging, with many warning that the impact of tariffs could increasingly pass through to businesses and consumers over the coming months. The June Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure, already indicated a marked rise. Today’s core CPI is anticipated to climb by 0.3%, the largest monthly increase since January, which would push the annual rate to 3.1% – further above the Fed’s 2% target.

This leaves the Fed facing a challenge: rising inflation would typically argue against rate cuts, but labour market data has shown a clear slowdown in hiring. Rates have been on hold all year as policymakers await clarity on inflation trends and tariff impacts, but weaker employment figures may increase the case for easing. On the political front, this is the first CPI release since President Trump dismissed Erika McEntarfer, the head of the Bureau of Labor Statistics, after a poor jobs report, prompting concerns over the reliability of official economic figures.

The US dollar’s recent bounce is losing momentum. The dollar index is struggling to hold gains and remains under pressure from fiscal concerns, suggesting a prolonged period of weakness is possible.

GBP

Sterling has moved slightly higher against the US dollar following the latest UK labour market data, although currency traders showed limited reaction as the figures were broadly in line with forecasts. Wage growth slowed more than expected, with average weekly earnings rising 4.6% compared to 4.7% expected and down from 5% previously. Unemployment held steady at 4.7%, while wage growth excluding bonuses stayed at 5%, indicating persistent pay pressures. Private sector earnings eased to 4.8%, and the number of payrolled employees fell for the sixth month in a row, marking the weakest stretch since the pandemic.

Job vacancies have now declined for the 37th consecutive period, and the ratio of vacancies to unemployed workers has also fallen, indicating a less tight labour market. Despite these signs of cooling, wage growth remains above the level consistent with the Bank of England’s inflation target.

This backdrop supports the Bank of England’s recent decision to keep rates unchanged while maintaining a hawkish tone, suggesting that rate cuts are unlikely in the near term. Continued elevated wage growth is sustaining inflation concerns, lending ongoing support to the pound – though this could fade if pay pressures ease more quickly in the months ahead.

EUR

The euro dipped yesterday to test support at $1.1600, remaining within the $1.1600–$1.1670 range seen in recent days. Following the disruption caused by the US labour market data and the subsequent dismissal of the head of the BLS, the euro gained fresh momentum and is now up 1.7% for the month to date. However, confidence in the eurozone’s ability to secure a favourable trade deal remains subdued.

This environment creates a muted outlook for both the euro and the US dollar, with further gains for EUR/USD likely requiring a clear market catalyst. In the absence of such drivers, price action has remained relatively directionless.

Nonetheless, short-term risks lean towards further upside for EUR/USD. The currency pair continues to find underlying support, and narrowing two-year yield differentials between the eurozone and the US reflect expectations that the Federal Reserve may resume cutting rates before long. This backdrop reinforces sentiment-driven support for the euro during periods of recovery.

Looking ahead

The next major test for markets will be today’s US CPI release, which could set the tone for dollar performance in the weeks ahead. For sterling, wage growth trends will remain in focus as the key driver of Bank of England policy expectations. In the eurozone, confidence remains fragile, but narrowing rate differentials offer scope for further gains if the US dollar stays under pressure.