Euro advances as US Dollar weakens amid cooling Inflation

The euro edged higher on Thursday as the US dollar weakened, driven by a softer-than-expected US Consumer Price Index (CPI) report in July. The inflation in the United States slowed down across various goods and services, dampening projections for a significant Federal Reserve rate hike in September. The headline CPI rose 3.4% year-over-year in July, down from 3.5% in the previous month, while core CPI, excluding food and energy costs, increased 2.5% year-over-year, matching market expectations.

The relatively lower inflation data has adjusted market expectations for future Federal Reserve policy shifts, with the probability of a rate hike in September at around 40.1%, down from a previous 60% chance. However, the path for the risk-sensitive EUR/USD pair may be limited by escalating geopolitical tensions between the United States and Iran.

Meanwhile, economic data from the Eurozone continues to bolster the European Central Bank's (ECB) hawkish outlook. Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), rose to 2.9% in July, slightly above the ECB's 2% target, but still supports the ECB's expectation of another 25-basis-point rate increase in September.