FX Update: US Dollar Consolidates as ECB Dovish Comments Impact EURUSD, UK Inflation Eases, Sterling Faces Challenge

In the FX  

The US dollar index consolidates at the lowest levels since April 2022, as the oversold market conditions certainly encourage short-term traders to pause and take a breather. Also helping are some dovish comments from European Central Bank's (ECB) Knot yesterday, who said that monetary tightening beyond next week's meeting is not guaranteed, while at least two 25bp hikes were seen as almost a done deal by markets until yesterday. Ignazio Visco also hinted that inflation could ease more quickly than the ECB's latest projections. So the comments sent the German 2-year yield to a 3-week low. The EURUSD bounced lower after hitting 1.1275, and rising dovish voiced from the ECB could keep the EURUSD within the 1.10/1.12 range into the next policy decision.  

Across the Channel, inflation numbers freshly came in this morning, revealing that inflation in Britain eased to 7.9% in June versus 8.2% expected by analysts and 8.7% printed a month earlier. Core inflation on the other hand fell below the 7% mark last month. Cable slipped below 1.30 as a kneejerk reaction as softer inflation tempered Bank of England (BoE) hawks. But even with a softer-than-expected figure, inflation in Britain remains high and stickier than in other Western economies, and that keeps odds for further BoE action sensibly more hawkish than for other major central banks. The BoE raised its policy rate to 5% at its latest meeting, and is expected to continue toward 6.5 to 7% range in the next few months. If inflation slows, the peak rate will be pulled to 6-6.5% range, but not lower. And rising rates, that weigh on mortgages in Britain where Brits must renew mortgages every 2-5 years, pressure housing market and fuels the worst living crisis in decades, combined with political shakes into next year's elections are all factors that could stall the rally in sterling against major peers. Cable benefited from a broad-based weakness in the US dollar since last September dip, but gaining field above the 1.30 mark could prove difficult.