Euro remains stronger following July’s Eurozone HICP data

• Euro holds firm as Eurozone annual inflation reached 2.9% in July, exceeding the ECB's 2% target.
• ECB Chief Economist Philip Lane warned that war with Iran will likely keep 2026 inflation around 3%.
• Traders remain cautious ahead of the Federal Reserve’s July Meeting Minutes for guidance on future interest rates.

EUR/USD rises after registering minor losses in the previous day, trading around 1.1600 during the European hours on Wednesday. The pair holds ground as the Euro (EUR) remains stronger following the release of Eurozone Harmonized Index of Consumer Prices (HICP) data for July. Eurozone annual inflation rose to 2.9% in July from 2.8% in June, matching preliminary estimates and staying above the European Central Bank's 2.0% target. Core inflation, excluding food and energy, also ticked up to 2.5% from 2.4%.

El Niño risks keep ECB hawkish as Eurozone inflation seen near 3%

Analysts at ING argue that the recent surge in energy costs is reinforcing the European Central Bank’s hawkish bias, noting that “high energy prices also maintain the hawkish undercurrent at the European Central Bank.” They highlight comments from ECB Chief Economist Philip Lane, who warned that Eurozone inflation could remain “at 3.0% all year and perhaps staying high next year as well,” with the El Niño weather event expected to “drive food inflation globally” and add another layer of upside risk to the price outlook.

Moreover, the EUR/USD pair rises as the US Dollar (USD) loses ground on easing expectations of a US interest rate hike next month. Recent economic data showed that US Retail Sales dropped in July for the first time in nine months, compounding concerns after unexpected job losses last month and tame CPI inflation figures.

According to the CME FedWatch tool, traders now price in just a 32.8% chance of a rate hike at the Fed’s September meeting, down significantly from 51.2% a month earlier. Traders are now turning their focus to the upcoming release of the Federal Reserve’s July Meeting Minutes for further market direction.

Dollar slide adds to already strong domestic inflation pressures

Strategists at BNY Mellon caution that the adjustment underway in the Dollar could unfold faster than many expect, noting that “that timeline could prove conservative.” They point out that “the Dollar is already weakening in nominal terms, introducing some pass-through inflation risk, even if the US is less exposed to this channel than more export-dependent economies.” This prospective external impulse, BNY adds, “comes on top of uniquely strong domestic inflation pressures from capital expenditure and demand,” reinforcing their view that the current Dollar move is occurring against a backdrop of already elevated underlying price dynamics.