FX Market Update: Dollar Firm Ahead of CPI as Sterling and Euro Await Direction.

USD – Remains firm, with markets highly sensitive to this afternoon’s CPI release as expectations for a September rate hike sit finely balanced.

EUR – Remains under pressure from elevated energy prices, with EURUSD drifting lower and today’s US inflation data likely to dictate near-term direction.

GBP – Is relatively steady for now, with attention split between today’s US CPI release and tomorrow morning’s UK Q2 GDP figures.

USD:

The dollar is trading in a stronger position than it was this time last week, despite Friday’s payrolls figure falling into negative territory. Attention now turns firmly to this afternoon’s CPI inflation report, which is likely to provide the next major catalyst for the currency.

With Chair Warsh offering little guidance on the future path of interest rates, markets have become even more sensitive to incoming economic data. Expectations for a September rate hike are currently close to 50/50, meaning any meaningful surprise in today’s inflation figures could shift rate expectations significantly.

Consensus forecasts are looking for headline CPI to ease from 3.5% in June to 3.4%, while core inflation is expected to fall from 2.6% to 2.5%. Meanwhile, crude oil prices remain elevated, and the US and Iran appear no closer to reaching an agreement, providing some additional support for the dollar.

EUR:

The euro remains under some pressure, with higher energy prices weighing on the currency. EURUSD has steadily moved lower from its post-payrolls peak last Friday, leaving today’s US CPI report as the key driver for the pair this week.

With Federal Reserve rate-hike expectations finely balanced, the direction of EURUSD is likely to depend heavily on how today’s inflation figures influence those expectations. A stronger-than-expected CPI print could increase expectations for a September hike and place further pressure on the euro, while softer inflation could provide some near-term relief.

For now, the euro lacks a significant domestic catalyst, meaning broader dollar dynamics and developments in energy markets are likely to remain the dominant drivers.

GBP:

Sterling is likely to be largely in the hands of the US CPI data this afternoon, with domestic developments providing relatively little immediate direction.

There are some political headlines surrounding Burnham’s handling of early prison releases, although markets remain more focused on the potential direction of his fiscal policies, where details remain limited so far.

Attention will then turn to UK GDP data early tomorrow morning. Markets are expecting the economy to have grown by 0.4% quarter-on-quarter during Q2, although the June monthly figure is forecast to show a less encouraging 0.1% contraction.

In the near term, sterling therefore remains vulnerable to shifts in dollar sentiment today, before tomorrow’s growth figures provide the next major domestic test.

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