Euro Surges Amid Cooling Inflation in the US and UK.

• Euro Reaches New Highs: The euro surged to its highest level since January, driven by lower-than-expected inflation data from both the US and UK, and a weakening US dollar.
• European Markets Rebound: European stock markets are recovering strongly after early August turmoil, supported by positive risk sentiment and anticipation of potential rate cuts from global central banks.
• Pound Gains but Faces Pressure: The British pound strengthened against most major currencies, despite expectations of future rate cuts by the Bank of England due to cooling inflation and steady economic growth in Q2.
• US Dollar Weakens: The US Dollar Index fell to a four-month low as inflation slowed, reinforcing expectations for a less aggressive Federal Reserve rate cut next month.
• Global Rate Cut Expectations: As central banks worldwide consider rate cuts, the upcoming European Central Bank meeting is highly anticipated, with possible cuts in September and November amid rising eurozone inflation.

EUR: The euro has soared to its highest point since January, fueled by lower-than-expected inflation data from both the UK and the US. European stock markets are poised to continue their recovery after early August’s volatility, driven by a strong risk-on sentiment. The euro and European equities both climbed following Tuesday’s release of US inflation data, which revealed a year-on-year drop to 2.9% in July from 3% in June—below the anticipated 3%. As a result, the euro crossed the 1.1 mark against the US dollar for the first time since January, with the EUR/USD pair jumping 3% since late June due to a weakening dollar. The US Dollar Index, which tracks the dollar against a basket of currencies, fell to a four-month low. With expectations that the Federal Reserve will start cutting rates next month, there’s speculation that global central banks may follow suit, potentially sparking a currency war. The euro also gained ground against the British pound after UK inflation data for July came in cooler than expected. The EUR/GBP pair rose by 0.44% to just under 0.86, a one-week high, as the pound weakened amid growing expectations of further Bank of England rate cuts this year. In August, the euro gained 2% against sterling, seen as a safe-haven currency amid global turmoil earlier in the month. With more central banks likely to join the rate-cutting trend, next month’s European Central Bank (ECB) meeting will be closely watched. An ECB official has indicated potential rate cuts in September and November, though rising inflation in the eurozone complicates the outlook.

GBP: The British Pound (GBP) is showing strength against most major currencies, except for the Australian Dollar (AUD), in Thursday’s London session. Sterling has gained as the UK Office for National Statistics (ONS) reported that the economy grew as expected in Q2. The preliminary GDP report indicated that the UK economy expanded by 0.6% quarterly and 0.9% annually. Although growth slowed from the previous quarter, it remained solid. The UK economy flatlined in June as anticipated, but steady growth and easing price pressures are a relief for Bank of England (BoE) policymakers, who have been concerned about the economic strain of prolonged high interest rates due to persistent inflation. On Wednesday, the Consumer Price Index (CPI) report for July showed that core CPI, which excludes volatile items like food and energy, fell more sharply than expected to 3.3%, down from 3.5% in June. This drop was driven by declining price pressures in the service sector as wage growth slowed, raising expectations for a BoE rate cut in September. Markets are now pricing in a 44% chance of a quarter-point rate cut, up from 36% before the data was released, according to Reuters.

USD: The US Dollar (USD) is consolidating its weekly losses against major currencies early Thursday. Later in the day, the US economic docket will feature key data releases, including weekly Initial Jobless Claims, Retail Sales, and Industrial Production figures for July. Manufacturing surveys from regional Federal Reserve (Fed) banks and comments from Fed officials will also be closely monitored by the markets. On Wednesday, the USD struggled to attract buyers after the Bureau of Labor Statistics reported that both the Consumer Price Index (CPI) and core CPI rose by 0.2% month-on-month in July, in line with expectations. The USD Index ended its fourth consecutive day in the red on Wednesday, with the benchmark 10-year US Treasury bond yield dipping toward 3.8%. Early Thursday, the USD Index remained steady at around 102.50, with the 10-year yield hovering slightly above 3.8%. Meanwhile, US stock index futures traded marginally higher after modest gains on Wall Street. The CPI report showed a moderate rise in July, with annual inflation slowing to below 3% for the first time since early 2021, reinforcing expectations for a rate cut next month, though likely less aggressive than markets had hoped. This aligns with the mild increase in producer prices, suggesting inflation is on a downward trend, allowing the Fed to focus more on the labor market amid concerns of a significant economic slowdown. “It mildly shrank the expectations of targeting a 50-basis point rate cut in September,” noted Amo Sahota, director at Klarity FX in San Francisco, adding, “It’s been a much quieter, reflective approach to the inflation numbers.”