The latest US Consumer Price Index (CPI) report for July showed headline inflation edging down to 3.4% year-over-year and core CPI cooling to 2.5%, both matching market forecasts and consensus expectations [2][5]. This benign inflation print initially weakened the US Dollar, with the dollar index falling to a low of 99.613 before rebounding to around 100.00 as markets trimmed but did not abandon expectations for a September Federal Reserve (Fed) rate hike [2]. The CME FedWatch tool reflected a drop in the probability of a September hike to roughly 36%, down from 48% a day earlier [5]. MUFG and UOB analysts expect the Fed to leave rates on hold in September, with MUFG noting that USD stability is likely over the summer and UOB projecting the Fed will remain on hold through 2026 before gradual cuts in 2027 [2][4]. However, both warn that elevated energy prices and unresolved geopolitical tensions, particularly in the Middle East, pose upside inflation risks [2][4][5].
In the currency markets, USD/JPY closed little changed at 159.41 after briefly dipping to 158.58 and rebounding to 159.54, with UOB analysts maintaining a bearish bias for the yen against the dollar within a broader 157.00–160.20 range [1]. MUFG reports that the Japanese Yen has strengthened modestly, supported by expectations for a faster pace of Bank of Japan (BoJ) policy tightening. A Bloomberg report suggests Prime Minister Takaichi’s government supports a near-term BoJ hike, likely in September or October, and Kyodo highlights that joint FX intervention was enabled by Governor Ueda’s hawkish stance [6]. Market participants have already priced in around 19bps of BoJ hikes by September, and the BoJ has 'effectively left itself with no option other than a rate hike at its next Monetary Policy Meeting on 17th-18th September' [6]. With USD/JPY rising towards 160.00, intervention risks remain in focus, and Japanese policymakers hope the threat of intervention will slow yen weakness [6].
For the Euro, ING maintains a constructive stance on EUR/USD, targeting 1.1600 in coming weeks, 1.1700 in autumn, and 1.1800 by year-end, based on the view that the Fed is unlikely to deliver further tightening [3]. However, ING warns that the lack of clear catalysts and Gulf risks could keep EUR/USD confined to tight ranges and low volatility, with buyers expected to re-emerge around 1.1500 [3].
The Swiss Franc (CHF) remains stronger following domestic Producer and Import Prices data for July, which fell by 2.1% year-on-year and slipped 0.1% month-on-month, marking a third consecutive monthly drop driven by lower petroleum-related costs [5]. Analysts at OCBC note that near-term inflation risks remain limited, and domestic inflation is subdued and below the midpoint of the Swiss National Bank's (SNB) 0-2% price stability range, reinforcing the case for a patient policy stance and continued CHF weakness in the near term [5]. USD/CHF depreciated after three days of gains, trading around 0.8130 during European hours on Thursday [5].
Across all sources, the interplay between central bank policy signals, inflation data, and geopolitical risks is driving volatility and uncertainty in major currency pairs, with market participants closely watching for further developments and potential interventions.
CONCLUSION
Recent US CPI data and shifting Fed expectations have led to near-term stability for the US Dollar, while BoJ hike speculation and intervention risks are supporting the Japanese Yen. The Euro and Swiss Franc are also influenced by subdued inflation and policy outlooks. Overall, central bank signals and geopolitical tensions remain key drivers for FX markets, with high volatility and intervention risks expected in the coming weeks.