Forex Today: US Dollar extends pullback to start new week

Monday, August 17 brings a continued decline for the US Dollar as the week commences. Market participants will closely monitor Canada's July Consumer Price Index (CPI) data later in the day, while the United States' economic calendar remains quiet. The US Dollar demonstrated weakness against major currencies over the past week, notably against the Australian Dollar. The heat map illustrates the percentage changes between major currencies, with the US Dollar appearing weakest against the Japanese Yen.

Following weaker-than-expected producer inflation figures on Thursday, Friday's US data revealed a 0.6% contraction in Retail Sales on a monthly basis, falling short of the anticipated 0.1% increase. The University of Michigan's Consumer Sentiment Index also dropped to 51 in August, down from 55.2 in July.

The USD Index continues its downward trend, closing in the red on Friday and falling 0.2% on the day to 99.43. BNY analysts state that "softer US data in recent weeks have diminished rate hike expectations for the remainder of 2026," questioning the possibility of a new tightening cycle. They posit that "future inflation progress could confirm the belief that the Federal Reserve is finished with rate hikes," effectively solidifying the notion that policy tightening is unlikely.

Against this backdrop, BNY anticipates upcoming economic data and communications to hold more nuanced significance. The bank highlights that "PMIs will be monitored to confirm growth resilience as inflation concerns wane, but unless they deliver surprise, we doubt they'll impact the rates complex significantly." Similarly, BNY expects "FOMC minutes to offer insights into the Committee's stance, yet with recent data still fresh in investors' minds, they are unlikely to alter the broader Fed outlook."

Meanwhile, the Iran-US Memorandum of Understanding (MoU) is set to expire on Monday without a broader agreement. WTI Crude Oil prices remain relatively stable in the European morning, trading marginally lower at around $81. USD/CAD remains under slight bearish pressure, trading near its lowest level since early June at 1.3860. Japan's Gross Domestic Product (GDP) increased at an annual rate of 1.1% in the second quarter, below the 2% market expectation, yet USD/JPY remains in negative territory around 159.00.

EUR/USD maintains its bullish trend, nearing 1.1600, while GBP/USD edges higher, trading at approximately 1.3550. Gold remains resilient after last week's volatile action, holding steady around $4,400. Inflation, which measures the increase in the price of a basket of goods and services, is typically expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis.

Core inflation, which excludes volatile elements like food and fuel, is the figure central banks aim to control, usually targeting 2%. When core inflation exceeds 2%, interest rates typically rise, strengthening the currency. Conversely, lower inflation usually supports the currency.