The U.S. dollar stabilized during early European trade on Wednesday as traders exercised caution while awaiting the release of the latest U.S. inflation data. Meanwhile, the British pound weakened following news that the U.K. economy contracted more severely than expected in July.
As of 03:20 ET (07:20 GMT), the Dollar Index, which gauges the performance of the greenback against a basket of six other major currencies, traded slightly higher at 104.377. This followed a recent dip to a one-week low experienced on Monday.
U.K. Economy Contracts Sharply in July
The GBP/USD currency pair dropped by 0.3% to 1.2452, with sterling adversely affected by the announcement that the U.K. economy had contracted by a larger-than-expected 0.5% in July. This marked the most significant monthly decline observed this year, contrary to the predicted drop of 0.2%.
July’s data revealed declines across all major sectors of the U.K. economy, including services, manufacturing, and construction.
Despite this economic contraction, the Bank of England is widely anticipated to proceed with an interest rate hike when its policymakers convene next week. This would mark the 15th rate increase since late 2021, with interest rates projected to rise from 5.25% to 5.5%. The economy has avoided the feared recession, wage growth remains robust, and official statistics now indicate that the U.K. rebounded from the COVID-19 pandemic earlier than initially thought.
ECB Contemplates Rate Hike Amidst Inflation Concerns
The EUR/USD currency pair experienced a 0.1% decline to 1.0738, retracing from the one-week high of 1.0777 attained in the prior session.
Anticipation surrounds the European Central Bank’s upcoming meeting on Thursday, as traders adjust their positions following a Reuters report suggesting that ECB policymakers foresee inflation in the 20-nation eurozone remaining above 3% in the coming year. This data reinforces the case for a tenth consecutive interest rate increase.
August data indicates that inflation in Germany, the eurozone’s leading economy, maintained a level above 6%, a stark contrast to the ECB’s 2% medium-term target.
However, concerns about weak growth persist, with industrial production in the eurozone expected to have contracted by 0.7% on a monthly basis in July, according to data set to be released later in the session.
U.S. Inflation Figures to Shape Federal Reserve Outlook
Trading volumes are expected to remain thin on Wednesday ahead of the U.S. consumer price index release later in the session. This data has the potential to influence the Federal Reserve’s stance during its meeting next week.
The core CPI, which excludes volatile food and energy prices, is projected to ease to 4.3% year-on-year in August, down from the previous 4.7%. Nevertheless, surging oil prices indicate that the annual headline figure could climb to 3.6%, up from 3.2% in the previous month.
Federal Reserve officials have hinted at the possibility of a pause in rate hikes during their upcoming meeting. They have raised rates at 11 of their past 12 meetings while evaluating their progress. However, persistent inflationary pressures may indicate the likelihood of further rate increases before the end of the year.
In other currency pairings, USD/JPY edged up by 0.1% to 147.27, with the yen remaining near 10-month lows. This comes as traders digest recent statements from Bank of Japan Governor Kazuo Ueda concerning the potential termination of the central bank’s negative interest rate policy in the near future.
USD/CNY fell by 0.1% to 7.2854, with the yuan holding above 10-month lows, buoyed by continued supportive measures implemented by the People’s Bank of China.
