The US dollar fell against the euro and the Japanese yen on Wednesday, after hitting multi-week highs the previous day. The decline followed US data showing inflation driven by tariffs, prompting investors to scale back bets on interest rate cuts by the Federal Reserve.

Rising prices for a range of goods — including coffee, audio equipment, and home furniture — contributed to an increase in June inflation, with significant hikes recorded for heavily imported items.

This initially strengthened the dollar and pushed US yields higher, though the 10-year Treasury yield later fell by one basis point in London trading to 4.48%, down from Tuesday’s peak of 4.491% — the highest level since June 11.

Investors are now pricing in about 44 basis points of rate cuts by the Fed by December, down from more than 50 basis points earlier in the week.

Against the yen, the dollar slipped 0.1% to 148.65, after reaching a three-and-a-half-month high of 149.19.

The euro ended a five-day losing streak, rising 0.20% to $1.1625. The British pound also climbed 0.15% to $1.3405, after touching a three-week low the previous day.

Tiffany Wilding, economist at PIMCO, said: “The rise in goods inflation linked to tariffs justifies the Fed’s cautious stance, while the continued decline in service prices will support rate cuts in September and beyond.”

She added: “The concentration of inflation in core goods categories will make it easier for the Fed to justify rate cuts, even if overall inflation remains above target.”

Markets are now shifting focus to the US Producer Price Index data due later today, seeking further signals on whether price pressures are truly starting to build.

The US Dollar Index — which tracks the greenback against a basket of major currencies — fell 0.16% to 98.46.

Another factor influencing investor sentiment is speculation that Jerome Powell’s successor as Fed Chair could favor rate cuts.

President Donald Trump has repeatedly attacked Powell for not cutting rates, calling for his resignation on several occasions. On Tuesday, Trump said cost overruns in the Fed’s $2.5 billion headquarters renovation project might be grounds for dismissal.

Michael Pfister, foreign exchange analyst at Commerzbank, commented: “Trump’s attacks on the Fed’s independence are unlikely to stop. A 25-basis-point rate cut won’t satisfy him, as he’s calling for a 300-point cut. That makes it unlikely that the dollar’s current recovery will last long.”

In trade news, Indonesia announced Wednesday that it had reached a deal with the US after an “exceptional negotiation battle,” resulting in proposed tariffs on Indonesian goods being reduced from 32% to 19%.

Separately, Trump said Tuesday that a trade agreement with Vietnam is imminent, adding that more trade deals are in the pipeline, while also revealing new details on planned tariffs targeting pharmaceutical products.

Gold prices rose in the European market on Wednesday, resuming gains after a two-day pause and moving back toward a three-week high. This came as the recent rally in the US dollar paused in the foreign exchange market.

Following a second consecutive monthly rise in US consumer prices, investors are now awaiting further inflation data, which will offer stronger clues about the likelihood of interest rate cuts by the Federal Reserve this year.

The Price

Gold prices rose by 0.55% to $3,343.10, up from the session’s opening level of $3,324.38, after hitting a low of $3,323.69.

At Tuesday’s settlement, gold prices fell by 0.6%, marking a second straight daily loss due to continued profit-taking from the recent three-week high of $3,375.01 per ounce.

US Dollar

The US Dollar Index fell by 0.2% on Wednesday, retreating from a three-week high of 98.70, reflecting a decline in the US currency against a basket of major and minor rivals.

Aside from profit-taking, the dollar’s drop is also due to investor reluctance to open new long positions ahead of upcoming inflation data.

US Interest Rates

• On Monday, President Donald Trump renewed his criticism of Federal Reserve Chairman Jerome Powell, stating that interest rates should be at 1% or lower.

• The Consumer Price Index rose by 2.7% annually in June — its second monthly increase — up from 2.4% in May and exceeding the market’s forecast of 2.6%. This marks the highest reading since February.

• Price increases in goods such as coffee, audio equipment, and home furniture contributed to the rise in June inflation, with imported goods seeing significant hikes due to Trump’s tariffs.

• Following the data, CME Group’s FedWatch tool showed a drop in the probability of a 25-basis-point rate cut in July from 5% to 2%, while the likelihood of rates staying unchanged rose from 95% to 98%.

• For September, the odds of a 25-point cut dropped from 62% to 55%, while the chances of no change rose from 38% to 45%.

• According to data from the London Stock Exchange, traders are currently pricing in less than 50 basis points of total rate cuts for the rest of the year, with the first expected 25-point cut now projected for October.

• To reassess these expectations, investors are awaiting June’s Producer Price Index (PPI), due later today, which is considered a leading indicator of July’s consumer inflation trends.

Gold Outlook

• Brian Lan, managing director at Singapore-based dealer Gold Silver Central, said: “Gold is currently stable with a slight downward bias, especially with the US dollar holding strong.”

• He added: “However, many countries are still negotiating with the US over tariffs. There’s still a lot of uncertainty in the market, and many are seeking safe havens.”

SPDR Fund

Gold holdings with SPDR Gold Trust — the world’s largest gold-backed exchange-traded fund — remained unchanged yesterday for the second consecutive day, with total holdings steady at 947.64 metric tons.

The British pound edged higher in European markets on Wednesday against a basket of global currencies, holding above its three-week low against the US dollar recorded yesterday, and heading toward its first gain in nine days, supported by active buying from low levels.

Recent comments by Bank of England Governor Andrew Bailey have increased expectations of a UK interest rate cut in August. To reassess these expectations, investors are awaiting the release of key UK inflation data for June later today.

The Price

• Pound exchange rate today: The pound rose against the dollar by 0.1% to $1.3400, up from the opening price of $1.3385, with a recorded low at $1.3382.

• On Tuesday, the pound lost 0.3% against the dollar, marking its eighth consecutive daily loss — its longest losing streak since March 2020 — and hit a three-week low of $1.3379 due to the strengthening of the US currency and yields following strong US inflation data for June.

Andrew Bailey

Bank of England Governor Andrew Bailey told The Times on Monday that the direction of interest rates is definitely downward. In the interview, he gave a strong signal that the Bank would accelerate the pace of rate cuts if further signs of "slack" appear in the economy.

The term "slack" refers to a scenario where the economy is not operating at full capacity, with rising unemployment and slowing production. This is considered disinflationary and would reinforce the Bank’s confidence that inflation will fall to 2.0% by 2026, as currently forecast.

UK Interest Rates

• Traders are increasing their bets on Bank of England rate cuts, expecting at least 50 basis points of additional easing this year.

• The probability pricing for a 25-basis-point rate cut by the Bank of England in the August meeting currently stands above 80%.

UK Inflation Data

To reassess the current expectations regarding UK interest rates, investors are awaiting the release of key inflation data in the United Kingdom for June, which is expected to significantly influence the Bank of England's monetary policy path.

At 07:00 GMT, the Consumer Price Index is expected to show a year-on-year rise of 3.4% in June, matching the previous reading, while the core Consumer Price Index is also expected to rise by 3.5% year-on-year, also matching the prior reading.

Outlook for the British Pound

At Economies.com Today, we expect that if the UK inflation data comes in below market expectations, the likelihood of a rate cut in August will increase, which would lead to further downside pressure on the pound.

The Japanese yen declined in Asian markets on Wednesday against a basket of major and minor currencies, deepening its losses for the fourth consecutive day against the US dollar and hitting its lowest level in three months. It may soon fall below the 150-yen threshold due to the continued rise in yields on US 10-year Treasury bonds.

The latest US inflation report showed signs that President Donald Trump's tariffs have begun to affect prices, leading to reduced expectations of a US interest rate cut in September.

Despite rising expectations of a rate hike by the Bank of Japan in its meeting later this month, the market is still awaiting the release of more key economic data from Tokyo, including inflation, wages, and unemployment figures in the world’s third-largest economy.

The Price

• Japanese yen exchange rate today: The dollar rose against the yen by about 0.2% to ¥149.07 — the highest since April 3 — from today’s opening price of ¥148.83, with a low recorded at ¥148.71.

• The yen lost 0.8% against the dollar at Tuesday’s close, marking its third straight daily loss due to the US inflation data.

US Bond Yields

The yield on US 10-year Treasury bonds rose by 0.25% on Wednesday, extending gains for the fifth consecutive session, and reached a five-week high of 4.495%, which enhances the appeal of US dollar investments.

This development in the US bond market followed the release of the June US inflation report, which showed a second consecutive monthly rise in prices — the fastest pace in four months.

The Consumer Price Index rose by 2.7% year-on-year in June, up from 2.4% in May, surpassing market expectations of a 2.6% increase. This is the highest reading since February.

The rise in prices of various goods — such as coffee, audio equipment, and home furniture — contributed to the inflation uptick in June, with significant price hikes in these imported items due to Trump’s tariffs.

Following the data, and according to the CME Group's FedWatch tool: the pricing for a 25-basis-point interest rate cut at the September meeting dropped from 62% to 55%, while the probability of rates being kept unchanged rose from 38% to 45%.

Opinions and Analysis

• Nathaniel Casey, investment strategist at Evelyn Partners, said the rise in US commodity prices could be an early sign of inflationary pressures stemming from tariffs, though it is too soon to confirm this trend.

• Casey added: While this inflation report isn’t particularly alarming, the increase in commodity prices and ongoing uncertainty over future tariff levels might make the Federal Reserve and Chairman Jerome Powell hesitant to cut interest rates.

Japanese Interest Rates

• Recently released data in Tokyo has added pressure on policymakers at the Bank of Japan.

• Amid this data, the market pricing for a 25-basis-point rate hike by the Bank of Japan at the July meeting rose from 35% to 45%.

• To reassess these expectations, investors are awaiting more data on inflation, unemployment, and wages in Japan.