US inflation data for July came in largely as expected, providing relief to markets and central banks. The US Consumer Price Index (CPI) showed a deceleration in headline inflation from 3.6% to 3.5% year-over-year, with core inflation dipping to 2.5% from 2.6% according to one source [1], while another source reported headline inflation at 3.4% year-over-year and core at 2.5%, just below the 2.6% consensus [2]. This alignment with forecasts led to a tempered reaction in the bond and currency markets, with the US Dollar initially weakening but then stabilizing as traders reassessed the outlook for Federal Reserve policy [1][2].
For the British Pound, GBP/USD held steady near 1.3500 after reaching a high of 1.3546, supported by the in-line US inflation data and technical factors such as the pair trading above key moving averages and trendlines. The market is now focused on upcoming UK GDP figures, with expectations for annual growth to improve from 0.9% to 1.1%, but a potential quarterly slowdown from 0.6% to 0.4%. A weaker-than-expected GDP print could prompt investors to reconsider the likelihood of further Bank of England rate hikes [1].
The Australian Dollar, meanwhile, slipped slightly as the US Dollar steadied post-CPI. AUD/USD traded near 0.7070, holding above key technical support levels. TD Securities commented that the July inflation report should bring continued relief to the Federal Reserve, supporting the view that the Fed will keep its policy stance unchanged this year. However, the bank also noted that upcoming data, including the Producer Price Index (PPI), could influence expectations for future policy moves, as the Fed has lowered the bar for a rate hike and is awaiting further evidence before the September meeting [2].
Market pricing for a Fed rate hike in September remains mixed, with one source citing a 60% probability of a hold and nearly 40% for a 25-basis-point increase [1], while another notes that the odds for a hike are just under 50% [2]. For December, the probability of a rate hike is reported at 73%, though several inflation reports are still due before the December 9 meeting [1].
Geopolitical risks also linger, with reports of stalled US-Iran negotiations and increased military activity in the Strait of Hormuz, as well as US embassies in the Middle East preparing for extended periods with reduced staff due to the Iran war [1].
CONCLUSION
US inflation data met expectations, easing immediate concerns about aggressive Federal Reserve tightening and stabilizing major currency pairs. However, markets remain cautious, with upcoming economic releases and geopolitical tensions likely to influence sentiment and policy expectations in the coming weeks.