The euro's short lived climb ran out of air. As the US dollar found its footing again, EUR/USD ended a two-day run of gains and slipped into pressure. What makes it interesting is that the move owed little to any fresh weakness in the single currency and far more to a dollar steadying after a bruising few sessions. A cooler than expected inflation reading earlier in the week did blunt the greenback's edge, but not enough to knock the Federal Reserve off its tightening path. In short, rate-hike expectations were delayed, not derailed.
The dollar finds its footing
The US Dollar Index (DXY), which measures the greenback's value against a basket of six major currencies, is trading around 100.60. On Wednesday it had slid to 100.35, its lowest level since June 18, before turning higher and steadying. That rebound is exactly what stood in the way of the euro's advance. When the base currency strengthens, the currencies standing opposite it naturally come under pressure.
Inflation cools, yet the Fed holds its course
Inflation delivered the week's biggest surprise. June CPI fell 0.4% on the month, the largest one-month decline since April 2020. That drop dragged the annual rate down to 3.5% from May's 4.2% and snapped a three-month acceleration streak. Core prices went nowhere, flat on the month and easing to 2.6% year on year, with both figures coming in under consensus. Softer inflation usually eases the pressure on interest rates, yet expectations for further Fed tightening have not fully faded.
US data holds up
The health check on the economy read reasonably firm. US Retail Sales rose 0.2% month on month in June, exactly in line with expectations. May's figure was revised slightly higher to 1.0% from 0.9%. The Retail Sales Control Group also landed as expected at 0.5%, though that is down from May's 0.8% increase. On the labour side, Jobless Claims came in better than forecast, a sign that the job market is still holding up.
The ECB seen with one more hike
Europe's policy signal is fairly clear too. Most economists expect the European Central Bank to raise interest rates one more time this year. That expectation offers the euro some longer-term support, even as a firmer dollar weighs on it in the near term.
Middle East tensions push oil higher
On the geopolitical front, tensions have escalated sharply. The US carried out a fifth consecutive night of strikes against Iranian targets, while Tehran responded by targeting US assets in Kuwait, Bahrain and Jordan. The situation is more fraught still because Iran has instructed Yemen's Houthis to close the Bab el-Mandeb gateway to the Red Sea if the US strikes its power network. That waterway is critical to global trade and oil flows. The strain is showing up clearly in crude. West Texas Intermediate (WTI) is trading near $80 and has gained around 12% so far this week.
The euro's day across the majors
Against the major currencies, the euro's performance was mixed. In today's trade it was strongest against the Swiss Franc. So while it had to absorb pressure against the dollar, it kept its grip against some other currencies. The overall picture is straightforward: softer US inflation and firm US data let the dollar steady, stalling the euro's small rally, while rising Middle East tensions kept pushing oil prices up.
