A series of softer-than-expected US inflation reports, including unchanged US Producer Price Index (PPI) data for July and a lack of surprise in the Consumer Price Index (CPI), have led traders to scale back expectations for imminent Federal Reserve (Fed) rate hikes. The Bureau of Labor Statistics reported that the US PPI was flat in July, below the anticipated 0.2% increase, following a revised 0.1% decline in June. The core PPI rose 0.2% month-over-month, also below the 0.3% consensus, with annual headline and core PPI up 4.7% and 4.2% respectively [2][3][4]. These cooling inflation metrics have shifted market expectations, with the CME FedWatch Tool showing a 34.8% probability of a US rate hike in September, down from 40% after the PPI release [3].
This shift in Fed outlook has broadly undermined the US Dollar (USD), providing support to other major currencies. The British Pound (GBP) edged higher against the USD, snapping a two-day losing streak, though gains were capped by ongoing geopolitical tensions in the Middle East and mixed UK macro data [1]. The New Zealand Dollar (NZD) rebounded from a two-week low, buoyed by the weaker USD, but its upside was limited by easing domestic inflation expectations, which slipped to 2.34% in Q3 from 2.53% previously, reducing the likelihood of further Reserve Bank of New Zealand (RBNZ) tightening [4]. The Australian Dollar (AUD) continued to decline despite warnings from the Reserve Bank of Australia (RBA) that further rate hikes remain possible if inflation risks re-emerge. Analysts noted that previous RBA hikes are already slowing demand and tightening financial conditions, while the softer USD may limit further downside for the AUD/USD pair [3].
The Japanese Yen (JPY) strengthened as well, with the USD/JPY pair losing traction near 159.45. The soft US inflation data and speculation about potential currency intervention weighed on the USD. While the Bank of Japan (BoJ) is seen as likely to raise rates in September or October, strategists at Brown Brothers Harriman cautioned that monetary tightening alone has not been sufficient to reverse Dollar strength against the Yen, as US-Japan rate differentials have narrowed without a corresponding JPY rally [2].
Geopolitical risks, particularly the US-Iran standoff over the Strait of Hormuz, continue to provide a floor for the safe-haven USD. US Treasury Secretary Scott Bessent stated that Washington will apply unprecedented measures against Iran, while Iranian officials have threatened to make any conflict costly for the US. President Donald Trump claimed US control over the strategic waterway, while Iran has pledged to keep it closed until its demands are met. These tensions, along with attacks on vessels in the Red Sea and Bab el-Mandeb Strait by Iran-backed Houthis, have kept the geopolitical risk premium in play, limiting aggressive moves against the USD [1][4].
Looking ahead, market participants are awaiting the release of US July Retail Sales and the Preliminary University of Michigan Consumer Sentiment Index, as well as further Fed commentary and geopolitical developments, for additional direction. Technical analysis across the major pairs suggests near-term support levels are holding, but further gains may require stronger follow-through buying [1][2][3][4].
CONCLUSION
Softer US inflation data has reduced expectations for near-term Fed rate hikes, weakening the US Dollar and supporting other major currencies. However, ongoing geopolitical tensions and mixed domestic data are capping gains, keeping markets cautious. Investors are now focused on upcoming US economic releases and further developments in the Middle East for fresh impetus.