Dollar Inches Lower as Markets Await U.S. Inflation Data; Sterling Edges Up

• Dollar Index falls 0.1% to 98.317 ahead of July U.S. CPI inflation report.

• July CPI forecasted at 2.8%; ING sees inflation impacting Fed rate cut odds more than labor data.

• EUR/USD at 1.1618; GBP/USD rises; USD/CNY edges up; RBA cuts rate to 3.60%.

The U.S. dollar slipped modestly on Tuesday as investors awaited the upcoming release of July’s U.S. consumer price index (CPI), a critical indicator that could influence Federal Reserve interest rate decisions. 

By 04:15 ET (08:15 GMT), the Dollar Index, which measures the greenback against six major currencies, dipped 0.1% to 98.317, following a 0.5% gain over the previous two sessions.

Market participants focused on the inflation figures scheduled for later in the day, seeking signals about the Fed’s next steps. A moderate inflation reading might solidify expectations for an interest rate cut next month, while signs of tariff-driven price increases could prompt the Fed to hold off.

The headline annual CPI is predicted to rise slightly to 2.8% in July, up from 2.7% in June and still above the Federal Reserve’s 2% target. 

Analysts at ING noted that despite some adjustment in positioning ahead of the data, a higher-than-anticipated inflation print would likely bolster the dollar as markets could scale back the probability of a September rate reduction to below 20 basis points.

However, ING emphasized that labor market figures may carry more weight than inflation data, especially since tariff-driven inflation shocks are widely viewed as temporary, compounded by the recent significant revisions to payroll data.

In Europe, the euro strengthened slightly against the dollar, with EUR/USD reaching 1.1618, as traders awaited the August ZEW economic sentiment survey from Germany—a key gauge of the eurozone’s largest economy. The euro’s trajectory might also be influenced by forthcoming talks between Russian and U.S. leaders set for Friday, which could affect expectations of progress on the Ukraine conflict.

ING analysts anticipate that today’s U.S. CPI report could push EUR/USD back below 1.16, with potential downside risk toward the 1.150 support level if the Putin-Trump summit yields limited outcomes.

Meanwhile, GBP/USD rose 0.1% to 1.3451 after data revealed that the U.K.’s unemployment rate remained steady at 4.7% for the three months ending June—the highest since July 2021—with annual pay growth (excluding bonuses) holding at 5.0%. ING commented that despite signs of a cooler labor market compared to earlier in the year and other major economies, there is no clear impetus for an accelerated Bank of England rate cut.

Elsewhere, USD/CNY edged up slightly to 7.1897 following an agreement between China and the U.S. to extend the current tariff truce by 90 days, temporarily halting additional import tariffs. This development alleviated fears of an intensifying trade conflict and maintained tariff rates at lower levels, fueling hopes of a longer-term trade agreement.

In the Asia-Pacific region, USD/JPY inched 0.1% higher to 148.33, while AUD/USD declined 0.2% to 0.6503 after the Reserve Bank of Australia lowered its benchmark interest rate by 25 basis points to 3.60%.

This marked the third rate cut by the RBA this year, continuing its easing cycle initiated in the first quarter.