Euro gathers strength above 1.1500 as cooling inflation data weighs on US Dollar

The EUR/USD currency pair experiences a rise, nearing 1.1535 during the initial Asian trading session on Friday. The US Dollar (USD) loses strength against the Euro (EUR) following a weaker-than-anticipated US inflation report. Focus shifts to the US July Retail Sales data later on Friday. In July, US wholesale costs for goods and services remained steady, according to the Bureau of Labor Statistics on Thursday.

This unchanged figure followed a revised 0.1% decline in June and marked a significant slowdown from the expected 0.2% increase. This report further supports the notion that inflationary pressure is gradually diminishing after the previous Consumer Price Index (CPI) data released on Wednesday, putting downward pressure on the US Dollar.

By excluding food and energy, the core Producer Price Index (PPI) increases by 0.2% annually, below the market estimate of a 0.3% gain. Inflation-adjusted prices rose by 4.7% in July on an annual basis, while the core PPI climbed by 4.2% YoY during the same period. Market expectations for a US rate hike at the September meeting have decreased to 34.8%, down from 40% immediately after the PPI data, as per the CME FedWatch Tool.

The European Central Bank (ECB) is anticipated to raise interest rates by 25 basis points at its September monetary policy meeting. ECB President Christine Lagarde had previously expressed concerns that renewed Middle East conflicts and rising oil prices could pose upside risks to the Eurozone inflation outlook. Rabobank strategists highlight the conflicting forces currently influencing the USD outlook.

They suggest that "if Fed rate hike speculation eases, as RaboResearch anticipates, the USD could face potential downside risks." However, they also emphasize that "uncertainties surrounding the reopening of the Strait of Hormuz remain a USD-friendly factor," noting that at the onset of the Iran war, the market was positioned short of USDs, making the Dollar particularly vulnerable to shifts in geopolitical risk and safe haven demand.