Dollar on Edge Ahead of CPI.

  • Dollar watch: August US CPI expected at +0.3% MoM; downside risks for USD if print is soft.

  • PPI surprise: Headline and core fell -0.1% MoM, suggesting firms are absorbing tariff costs.

  • Fed outlook: Three 25bp cuts by year-end likely; little chance of 50bp unless CPI undershoots hard.

  • ECB meeting: Limited FX impact expected; cycle likely over, but France’s political risk lingers.

  • GBP resilience: Pound buoyed by gilt outperformance; jobs and inflation data next week will be key.

USD: CPI in Focus at 0.3% MoM
FX volatility has nudged higher since September began, but remains well below levels seen in spring and even early August. Heightened geopolitical risk – Israel’s strike in Qatar and Russian drones shot down in Poland – has not sparked a major FX reaction. Markets seem unconvinced these events will escalate further.

At this stage, US data remain the key driver of any sizeable volatility shift. August CPI lands today, with consensus – and our view – calling for a 0.3% MoM core print.

Yesterday’s PPI undershot, falling -0.1% MoM on both headline and core. July’s figures were also revised lower by 0.2pp, now showing +0.7% instead of +0.9%. The drag came from a sharp -1.7% MoM fall in “trade services,” effectively a proxy for corporate margins. This points to firms absorbing tariff-driven cost pressures rather than passing them onto consumers.

That may reflect caution on demand or a desire to avoid political backlash. Either way, it bolsters expectations that CPI won’t exceed 0.3% MoM. Such an outcome should help anchor bets for three 25bp Fed cuts by year-end. A 50bp cut next week remains unlikely unless inflation undershoots in a big way.

Risks today tilt to the downside for the dollar, with softer CPI potentially encouraging traders to reopen USD shorts that were pared back ahead of the data.

ECB: Contained Risks into the Meeting
Markets remain largely unfazed by events in Poland. The zloty has slipped modestly, losing 0.6% vs USD and 0.4% vs EUR, while EUR/CHF has pushed higher following dovish Swiss National Bank remarks.

Overall, the market stance on the Ukraine-Russia conflict has stayed cautiously optimistic. High-beta European currencies have held onto August gains despite limited progress towards peace talks. The euro has seen little net benefit, but even a partial unwind of optimism shouldn’t hit it hard.

Today’s spotlight is the ECB meeting. As flagged in our preview, the doves may push back against President Lagarde’s “good place” narrative. Yet recent communication and above-consensus core CPI suggest the cutting cycle is over.

Political tension in France still looms large, so markets may hesitate to fully price out the residual 15bp of easing for 2026. Overall, we expect a subdued meeting with limited FX fallout. Any hints on French bonds could weigh slightly on the euro, with EUR/USD likely steadying around 1.170–1.175 into the weekend.

GBP: Holding Firm
Sterling has extended gains against the euro as talk of unsustainable UK debt burdens has eased. UK gilts, especially at the 30-year point, have actually outperformed peers this month, with yields now 25bp below the 5.74% peak seen on 3 September.

The pound’s higher sensitivity to long-end selloffs versus USD and EUR means risks remain ahead of a potentially turbulent pre-Budget period on 26 November. Still, firm front-end rates underpinned by a hawkish Bank of England make selling GBP against EUR unattractive while gilt markets stay calm.

UK GDP for July is due tomorrow, but this is unlikely to shift the MPC’s near-term stance. Jobs and inflation data for August, due next week, will be far more decisive. Until then, EUR/GBP should stay gently offered.

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