Euro-Dollar Punches Through 1.17 on Fed Cut Bets
- Written by: Gary Howes
The Euro has punched above 1.17 against the Dollar, fuelled by mounting expectations of more aggressive Federal Reserve rate cuts.
Traders are now assigning a near-certainty to a September cut, with growing whispers of an outsized 50bp move.
July CPI data landed broadly in line with forecasts, reinforcing the view that the Fed can ease without reigniting inflation.
"In the end the surprise with the July CPI data was that there wasn’t a surprise," said Sam Hill, Head of Market Insights at Lloyds Bank.
Fed funds futures now price 61bps of cuts in 2025 and 65bps in 2026.
Over the same period, the European Central Bank is seen delivering just one more cut, tilting rate differentials in the Euro’s favour.
U.S. headline CPI rose 0.20% in July, holding the annual rate at 2.7% versus 2.8% expected. Gasoline prices fell 2.17% on the month, masking stronger core inflation.
Core CPI climbed 0.32% on the month, lifting the annual rate to 3.1% from 3.0%.
Chart courtesy of Lloyds Bank.
This could give cause for caution at the Fed, however, gains were led by core services, including a 4.0% jump in airline fares, adding just 0.05 percentage points to the overall services measure.
Owing to the one-off nature of the spike, economists at Pantheon Macroeconomics say the move is "no cause for alarm".
Investors are anxious that import tariff rises will raise costs for U.S. consumers, which could have negative knock-on effects for the economy.
But tariffs are yet to materially register in inflation and if tariff risks remain muted, investors judge the Fed has scope to cut rates multiple times in the months ahead.
In response to the data, market volatility has eased, U.S. stocks have rallied and the Dollar has softened.
But some warn the calm may be temporary.
"Delayed does not mean cancelled,” said Michael Pfister, FX Analyst at Commerzbank, noting higher tariffs only took effect last week.
Henry Allen, strategist at Deutsche Bank, says inflationary effects could take time to show.
"When it comes to the impact on inflation, it may be some time before we get a clear signal, as several tariffs were imposed as recently as August 7, whilst there are potentially more in the pipeline like pharmaceuticals and semiconductors," says Henry Allen, a strategist at Deutsche Bank.
