The release of the US Consumer Price Index (CPI) for July, which matched expectations and signaled ongoing disinflation, triggered significant moves across major currency pairs. The headline US CPI declined from 3.5% to 3.4% year-on-year, while core CPI eased from 2.6% to 2.5% over the same period [1][2][3]. This benign inflation report led to a repricing of Federal Reserve expectations, with the probability of a rate hold at the September meeting rising to 60%, up from 40% before the data release [1].
The Euro initially climbed to a two-day high of 1.1563 against the US Dollar following the CPI release but reversed gains to trade at 1.1522, down 0.17% at the time of reporting [1]. Despite steady German inflation data, with the Harmonised Index of Consumer Prices (HICP) holding at 2.8% in July, economists cautioned that rising energy prices remain a key inflation driver in the Eurozone [1]. Market participants are now awaiting further Eurozone data, including Spanish inflation and EU industrial production figures, which are projected to show an improvement from a -1.2% to -0.8% annual contraction in June [1].
In contrast, the Mexican Peso rallied to a two-year high against the US Dollar, with USD/MXN trading at 17.05 after touching lows of 17.01 [2]. The softer US inflation print prompted traders to trim bets on further Fed rate hikes, supporting the Peso's strength [2]. The US Dollar Index (DXY) was modestly higher at 99.98, up 0.17% [2]. According to a Citi Mexico survey, analysts expect Banxico’s key policy rate to remain at 6.50% through year-end, with a median forecast for USD/MXN to close 2024 at 17.90 [2]. Technical analysis shows USD/MXN below key moving averages, with the Relative Strength Index (RSI) at 28.78 indicating oversold conditions and a bearish near-term bias [2].
Meanwhile, the New Zealand Dollar (NZD/USD) slipped for a third consecutive day, trading near 0.5860 and down over 0.30% on Wednesday [3]. The Kiwi's decline was attributed more to domestic political uncertainty—after Prime Minister Christopher Luxon survived a second leadership challenge—than to US Dollar strength, as the US CPI data provided no fresh catalyst for the greenback [3]. Elevated Middle East tensions and the lack of progress on a US-Iran ceasefire extension further dampened risk appetite for currencies like the NZD [3]. Market participants are looking ahead to New Zealand's upcoming Reserve Bank inflation expectations and Business PMI data [3].
Technical outlooks across the three pairs reflect the shifting sentiment: EUR/USD holds a mildly bullish bias above key support levels, USD/MXN remains in a bearish trend with oversold momentum, and NZD/USD maintains a mildly bearish tone just above support, with further downside possible if key levels are breached [1][2][3].
CONCLUSION
July's US CPI data, which confirmed ongoing disinflation, led to a mixed reaction in currency markets: the Euro reversed gains, the Mexican Peso surged to multi-year highs, and the New Zealand Dollar continued to weaken amid domestic and geopolitical uncertainties. The market is now focused on upcoming inflation and production data from the Eurozone and New Zealand, as well as further signals from the Federal Reserve. Overall, the softer US inflation print has tempered expectations for additional Fed rate hikes, driving divergent moves across major FX pairs.