The EUR/USD pair experiences an uptick as the US Dollar faces challenges due to a moderation in US inflation for July, which in turn diminishes expectations for a rate hike by the Federal Reserve in September. Stalled US-Iran nuclear negotiations concerning Gulf conflict resolution could constrain potential upward movement for EUR/USD. Stronger Q2 Eurozone growth at 0.4% and inflation at 2.9% suggest a 25bps hike by the ECB in September remains probable. EUR/USD pauses its three-day decline, hovering near 1.1530 in the Asian trading session on Thursday. The currency pair gains ground as the US Dollar faces challenges following the release of July’s Consumer Price Index report.
Inflation in the United States has shown signs of moderation across a wide array of goods and services, leading to a notable easing of expectations regarding a substantial rate hike by the Federal Reserve in September. Data released by the Bureau of Labour Statistics indicates that the headline CPI rose 3.4% year-over-year in July, a decrease from the previous rate of 3.5%. Core CPI, which excludes the more volatile food and energy prices, increased by 2.5% year-over-year, a slight decline from the 2.6% recorded in June. Both readings aligned with market expectations. According to TD Securities, July US consumer price inflation “matched expectations,” with the headline CPI rising “0.1% m/m (0.074% before rounding; TD: 0.15%, consensus: 0.1%).” The strategists note that the modest increase was “partly explained by still retreating energy prices (gasoline -3% m/m) and slowing food inflation,” underscoring the role of softer fuel and food costs in keeping overall price pressures contained.
In light of the recent inflation data, market expectations regarding future Federal Reserve policy adjustments have been recalibrated. According to the CME FedWatch tool, interest-rate swaps currently indicate an approximate 40.1% probability of a rate hike in September. Odds for an October move decreased to approximately 60% from 75% the day prior, with the next possible rate increase not fully accounted for until December. However, the upside momentum for the risk-sensitive EUR/USD pair may remain constrained by escalating geopolitical tensions between the US and Iran. A senior Iranian official indicated that Washington and Tehran continue to be at an impasse regarding a definitive resolution to conflicts in the Gulf, citing a complete lack of advancement in both reviving the interim agreement and setting an implementation timeline.
Meanwhile, the macroeconomic landscape in the Eurozone remains conducive to the European Central Bank’s hawkish position. Market-based inflation expectations for the Euro Area over the next year are approximately 2.4%, which continues to exceed the ECB’s official target of 2%. Meanwhile, actual inflation in the Eurozone rose to 2.9% in July. In conjunction with a robust economic forecast, underscored by a 0.4% increase in Q2, marking the most vigorous rate since the beginning of 2025, analysts have become progressively more optimistic regarding the region’s growth prospects. While short-term growth may experience a slowdown prior to a resurgence, investors are anticipating that the ECB will implement an additional 25-basis-point rate increase in September.
