Cooling US Data Weakens Dollar Amid Energy Risks (17 – 21 August)

Global markets entered the week with the US dollar under renewed pressure as softer inflation, retail sales, and employment data reduced expectations for another near-term Federal Reserve rate hike. The Dollar Index traded around 99.61, while markets assigned roughly a 65% probability that the Fed will keep rates unchanged at 3.50%–3.75% in September. Gold and silver extended their gains as the shift in Fed expectations supported precious metals, while the euro and pound benefited from the dollar’s declining yield advantage.

Geopolitical risks remained an important counterweight. Brent crude stayed elevated as negotiations over reopening the Strait of Hormuz remained unresolved, while fresh Israeli strikes in Lebanon and new US sanctions targeting Iran kept tensions high. Investors are now turning their attention to the FOMC minutes and Fed Chair Kevin Warsh’s Jackson Hole speech for further guidance on monetary policy. In Europe, persistent inflation continues to support ECB tightening expectations, while stronger UK growth and elevated Japanese price pressures keep the BoE and BOJ outlooks in focus.

Market Drivers & Catalysts

• Fed Rate Hike Expectations Fade: Softer US inflation, weak retail sales, and disappointing July employment data reduced expectations for further tightening. Markets now see roughly a 65% probability of a September hold, leaving rates at 3.50%–3.75%, while the implied probability of a hike has fallen to around 35%.
• US Consumer Demand Weakens: July retail sales unexpectedly fell 0.6% month-on-month, compared with forecasts for a 0.1% increase, while the GDP-linked control group declined 0.4%.
• Inflation Continues to Cool: US annual CPI slowed to 3.4% from 3.5%, while annual core inflation eased to 2.5%. Producer inflation also moderated to 4.7% from 5.5%.
• Middle East Risks Persist: Fresh Israeli strikes on Lebanon killed 11 people, including a senior Hezbollah commander, while Washington prepared new sanctions against Iran as the US-Iran ceasefire approached expiry.
• Hormuz Talks Remain Deadlocked: Negotiations to reopen the Strait of Hormuz have made little progress, although Iran and Oman appear close to a separate arrangement. Covert crude flows through the waterway helped limit upward pressure on oil prices.
• Central Banks Remain in Focus: Investors await the FOMC minutes and Fed Chair Kevin Warsh’s Jackson Hole speech, while markets continue to expect another 25-basis-point ECB hike in September and speculate about a September or October BOJ increase.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield climbed to around 4.7%, approaching the 19-month high of 4.75% reached earlier in the week as investors remained reluctant to hold longer-duration debt. University of Michigan one-year inflation expectations increased for a fifth consecutive month to above 4%, reinforcing concerns that the Fed may be underestimating inflation risks associated with Middle East-driven energy costs. Fed Chair Kevin Warsh’s reluctance to prioritize additional rate hikes contributed to a steepening yield curve, with the 30-year Treasury yield reaching a 19-year high. Concerns that Japan could sell US reserves to support the yen added further pressure despite softer producer inflation and weak retail sales.
• UK 10-Year Bond Yield: The UK 10-year gilt yield declined to around 4.97% as investors balanced stronger domestic economic data against the interest rate outlook and Middle East uncertainty. UK GDP expanded 0.4% quarter-on-quarter in Q2, in line with forecasts, while June GDP grew 0.3% month-on-month, exceeding expectations. Household consumption, however, slowed to 0.2%. The Bank of England kept rates unchanged in July, with Governor Andrew Bailey maintaining that disinflation remains on track. Softer US data also reinforced expectations that the Fed will leave rates unchanged in September.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield rose to around 2.86%, its highest level in more than a month, amid rising expectations of a potential September BOJ rate hike. Producer inflation eased slightly to 7.2% in July from 7.3% in June, but remained elevated. The BOJ highlighted higher oil costs linked to Middle East tensions, rising prices for nonferrous metals and machinery associated with global AI demand, and tight labor conditions supporting wage pressures as important sources of inflation.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield fluctuated around 3.1% as European bonds tracked moves in US Treasuries and changing developments in the Middle East. Euro Area one-year inflation swaps remained around 2.4%, above the ECB’s 2% target, while headline inflation stood at 2.9% in July. The Eurozone economy expanded 0.4% in Q2, its strongest pace since early 2025. Markets continue to expect another 25-basis-point ECB rate hike in September, despite expectations that economic growth will moderate before regaining momentum.

Commodities

Gold climbed above $4,400 per ounce, extending its recent gains as softer US economic data reduced expectations for another Federal Reserve rate hike. The implied probability of a hike fell to roughly one-third from close to 50% following weaker retail sales, softer consumer sentiment, and tame inflation figures. Investors are now focused on the upcoming FOMC minutes and Fed Chair Kevin Warsh’s Jackson Hole speech. Geopolitical demand also remained supportive after renewed Israeli strikes on Lebanon and additional US sanctions targeting Iran. However, continued covert crude shipments through the Strait of Hormuz limited gains in oil prices and broader inflation fears.

Silver rose toward $66 per ounce, extending its gains as weaker US data reduced Fed tightening expectations. The probability of a near-term rate hike declined to roughly one-third from close to 50%, while softer inflation, retail sales, and consumer sentiment supported non-yielding assets. Middle East tensions also remained supportive ahead of the FOMC minutes and Warsh’s Jackson Hole speech.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index traded near 99.61, down around 0.31%, as cooling US economic data reduced the dollar’s yield advantage. Softer July employment figures and in-line inflation data lowered expectations for additional Fed tightening. Markets now price approximately a 65% probability that the Fed will keep rates unchanged at 3.50%–3.75% in September. Gold and the euro benefited from the shift in policy expectations, although tensions surrounding the Strait of Hormuz and crude prices near $82.40 continued to provide some safe-haven support for the dollar.
• Euro: EUR/USD opened the week around 1.1540–1.1570, supported by Friday’s weaker dollar. US annual inflation of 3.4% and disappointing July retail sales reduced September Fed hike expectations to around 35%. Meanwhile, Eurozone inflation remained elevated at 2.8%, keeping expectations for further ECB tightening intact and supporting the euro through a widening policy divergence.
• British Pound: GBP/USD traded firmly near 1.3540 after reaching a three-month high of 1.3560. UK second-quarter GDP growth of 0.4% combined with cooling US inflation and consumer sentiment to reduce the dollar’s rate advantage. The Fed’s 3.50%–3.75% policy range is now close to the Bank of England’s 3.75% rate, increasing the importance of this week’s UK economic releases for sterling.
• Japanese Yen: The yen traded around 159.4 per dollar, heading for a weekly decline of roughly 1%. The absence of additional currency intervention encouraged renewed bearish positioning, reversing around half of the gains generated by the record joint US-Japan intervention in late July. Wide interest rate differentials, fiscal concerns, and high energy import costs continued to weigh on the yen. Markets are considering a potential September or October BOJ rate increase, while US Treasury Secretary Scott Bessent urged Japan to support intervention with stronger domestic fundamentals.

Economic Data Highlights

• US Inflation (July): Annual CPI slowed for a second consecutive month to 3.4% from 3.5%, moving further below the 4.2% peak recorded in May 2023 as the energy shock associated with the Iran conflict continued to fade. Monthly CPI increased 0.1%, in line with expectations, supported by shelter and food costs. Core CPI increased 0.2% month-on-month, while annual core inflation eased to 2.5%.
• US Producer Prices (July): Producer prices were unchanged month-on-month, below forecasts for a 0.2% increase. Services prices rose 0.2%, and construction costs increased 2.2%, offsetting a 0.7% decline in goods prices. Energy costs dropped 3.1%. Annual PPI slowed to 4.7% from 5.5%, below the 4.9% forecast, while core PPI increased 0.2% monthly and 4.2% annually, both slightly below expectations.
• US Retail Sales (July): Retail sales declined 0.6% month-on-month, missing expectations for a 0.1% increase and reversing June’s 0.2% gain. This marked the first decline since October 2025. Weakness reflected lower nonstore retail spending following the shift of Amazon Prime Day to June, along with declines in autos, gasoline, and electronics. Excluding autos and gasoline, sales declined 0.2%, while the GDP-linked control group fell 0.4%, its sharpest decrease since early 2025.
• UK Monthly GDP (June): The British economy expanded 0.3% month-on-month, improving from zero growth in May. Services output increased 0.4%, led by professional and scientific activities and information services, while production and construction declined. Annual GDP growth reached 1.1%, beating forecasts of 0.8%, while growth over the three months matched expectations at 0.4%.

Macro Calendar Highlights

• UK Consumer Price Index (CPI)
• UK Core CPI
• FOMC Meeting Minutes
• US Initial Jobless Claims
• Philadelphia Fed Manufacturing Index
• Existing Home Sales
• Fed Chair Kevin Warsh’s Jackson Hole Symposium speech
• UK Retail Sales