Analysts at ING, led by Francesco Pesole, suggest that lower-than-expected US inflation data on Wednesday could propel the euro past the 1.16 mark against the dollar. Following weak US nonfarm payrolls last Friday, there is considerable room for the market to scale back expectations for Federal Reserve rate hikes.
In contrast, the European Central Bank has all but promised another rate increase in September. "The widening short-term interest rate differential remains the dominant factor driving the euro-dollar exchange rate, meaning the pair remains highly sensitive to Fed policy moves," the ING report noted.
Data from the London Stock Exchange Group (LSEG) shows the euro touched a seven-week high of 1.1580 on Friday, and is currently trading flat at 1.1554 dollars. Rising oil prices and ongoing US-Iran tensions are fueling inflation concerns, pushing UK government bond yields higher. Over the weekend, Iran presented new demands to the US, seeking compensation for war damages as a condition for a peace agreement. These new demands complicate negotiations and could delay the end of the conflict.
Investors are now awaiting key US inflation data and the UK's preliminary second-quarter GDP figures to gauge the health of the two economies. Tradeweb data indicates the UK 10-year gilt yield rose 0.4 basis points to 4.924%.
Gold, coming off its best weekly performance since January, is holding above $4,400 per troy ounce. Investors are waiting for the critical US inflation data to determine the Fed's next policy steps. Analysts at Saxo Bank attribute the recent gold rally to "weaker US economic data reducing near-term rate hike risks, mounting US fiscal debt concerns, a softer dollar, and continued buying from central banks and Asian investors."
Following the surprise drop in US employment in July, the CME FedWatch Tool now prices the probability of a September rate hike at just 44%. In early European trading, New York gold futures rose 0.2% to $4,410 an ounce.
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