Euro Weakens on Tariff Ruling and Inflation; ECB Rate Steady Expected

The euro weakened further against the US dollar on the second day and EUR/USD traded around 1.1620[1] in the early Asian hours of Wednesday. It is believed that traders will be watching the latest HCOB Purchasing Managers’ Index (PMI)[2] rates of the Eurozone and Germany later in the day. It is noted that the dollar is stable with US Treasury[3] yield increasing, two-year-yield stands at 3.65, and the ten-year-yield at 4.28, which attracts investors to invest in American securities. But the sentiment has changed following the decision by the US Court of Appeals[4] that most of the tariffs by Trump are unlawful. However, the duties will stand until 14 October[5] pending a potential Supreme Court appeal.

Global reports[6], on Tuesday pointed out that the US Treasury Secretary Scott Bessent said the Supreme Court is likely to support Trump in his application of an emergency powers law that was enacted in 1977 to impose tariffs, although the administration has an alternative strategy should it not. Trump also promised to request a fast-track ruling. Meanwhile, the US dollar was put to the test because manufacturing activity[7] slowed a little in August. Marketers observed that the ISM Manufacturing PMI[8] increased to 48.7 against an expected 49.0. The Employment Index rose to 43.8 compared to 43.4 and the Prices Paid measure, which is one of the most important measures of inflation, fell to 63.7 compared to 64.8.

The spotlight is believed to be on the US JOLTS Job Openings and the Fed beige book, and traders will also be looking at critical labour data this week, such as ADP jobs, wages and August Nonfarm Payrolls which may influence the September decision by the Fed[9]. In the meantime, the euro is quiet because increasing government bond[10] yields in Europe are cause for alarm. Some analysts[11] note that the 30-year yield on France has risen to 4.5%, the highest in the country since 2009, with Germany at 3.41%, the highest it has been since 2011.

Global reports[12] state that the concern on the increasing debt in France is a key factor to the future confidence vote that Prime Minister François Bayrou is set to face. In the meantime, the German medium-term financial plan[13] envisages approximately 500 billion new borrowing by 2029 to finance infrastructure and defence. With these pressures, the Euro could experience a small downside, since strong inflation levels ensure that the European Central Bank (ECB)[14] is likely to leave rates constant in September. The Eurozone Inflation Rate[15], based on the HICP, increased 2.1% year-on-year in August, compared with forecasts and the 2% target of the ECB.

---

NZD Falls Amid Global Caution; Fed Rate Cut Expectations Pressure USD

Early on in the Asian session on Wednesday, NZD/USD traded below 0.5860[16]. Global marketers note that the New Zealand Dollar (NZD) remains under pressure despite the improved results of the Caixin Services PMI[17] in China. Traders are on the lookout because the focus is on future US data[18], especially the JOLTS Job Openings data and the Federal Reserve Beige Book, which will be released later today. These reports are believed to give new leads on the US economy[19] and shape what the Fed is likely to do next in its policy action.

According to Ratings Dog, on Wednesday, China Services PMI[20] improved to 53.0 in August, compared to 52.6 in July, and above expectations of 52.5. Some reports[21] believe, better than expected figure indicates that the services sector has some steady momentum, which gives a positive indicator to the Chinese economy. But this optimistic reading is still overshadowed by caution in the wider markets. Market experts[22] feel that the Kiwi which is regarded as the barometer to the development of China did not stand a chance because traders remain highly cautious to global economic uncertainties.

The recent global bond market sell-off, according to global commentators[23], is making investors averse to risk, a factor that is benefiting safe-haven currencies such as the US Dollar (USD). Others are of the opinion that most investors fear the increasing levels of debts in leading economies. Marija Veitmane[24], head of equity research at State Street Markets, commented today that the risk-off mood is due to wider market issues associated with the bond market. This anxiety is influencing the mood of the market in general.

Markets are already pushing the Federal Reserve[25] to cut interest rates at its September meeting, and the speculation is being driven by dovish remarks by Fed officials. Global reports[26] point out that these expectations will exert pressure on the US dollar in the short term. The CME FedWatch tool[27] shows that investors today believe there is about a 91% chance of the 25-basis point rate reduction in this month, compared with 85% last week. Global reports[28] noted that this increased opinion reflects a changing mindset that the Fed may grow more liberal on monetary policy, placing more pressure on the Greenback as traders shift their positions ahead of the next decision.

---

GBP/USD Dips as UK Finances Worry, Fed Rate Cut Expected Soon

The GBP/USD pair traded down to 1.3390[29] in Wednesday’s Asian trading, as the Pound Sterling weakened against the US Dollar. Global commentators noted that traders are still wary since there is concern about the stretched UK public finances[30], which still weighs on confidence in the currency. The US dollar (USD)[31], on the other hand, is supported by safe-haven demand and stable market sentiment. Investors are believed to shift their attention to the comments of Bank of England policymaker Sarah Breeden[32], who is to speak later in the day, in search of indicators of the central bank policy stance.

Some analysts noted that the 30-year interest rate[33] in Britain has risen to its peak since 1998, raising concerns on the capacity of the Labour government to maintain a tight rein on public expenditure. Global commentators[34] point out that the budget is not due until November, so there are weeks of speculation in markets about what might be done to increase taxes, and both investment and consumer confidence may be under a burden. It is believed that these financial issues, combined with a shaky economic future, may exert new selling pressures on the pound in the near future because traders are still nervous about the financial health of the United Kingdom[35] and its future growth.

A softer Federal Reserve (Fed)[36] position is expected and increasing speculation of rate cut at the September meeting would put pressure on the US Dollar and offset losses in the big currency duo. The CME FedWatch tool[37] reveals that markets are pricing in an approximate 91 percent probability of a 25 basis point interest rate reduction by the Fed on 17 September. Market reports[38] hold that such a move might have an influence on the dollar's appeal while allowing other currencies some breathing room against the greenback in weeks to come.

Certain reports[39] point out that traders are awaiting the last JOLTS Job Openings data in the US and the Beige Book released by the Federal Fed, both of which will be released on Wednesday. Attention will then shift to the US employment report of Friday, August. Economists are projecting approximately 175,000[40] new jobs and the result will be significant before the mid September meeting of the Fed. Market reports[41] noted that a lower-than-anticipated value may influence the argument of an interest rate cut by the Central Bank and exert downward pressure on the US dollar (USD), which is why the report would be closely monitored by markets.

---

USDCAD Rises on BoC Rate Cut Hopes, Oil Prices Influence

The USD/CAD pair traded higher for the third day in a row, hovering near 1.3795[42] in Wednesday's early European session. Market reports noted that the Canadian Dollar (CAD) is falling against the US Dollar because the markets believe that the Bank of Canada (BoC)[43] may also cut its rate this month. The focus now shifts to future US data releases, including the JOLTS Job Openings report and the Federal Reserve's Beige Book[44] later in the day, which might offer more insight into monetary policy and market trends.

Markets are counting upon a Bank of Canada (BoC)[45] rate cut as tariffs continue to weigh on the Canadian economy. Traders now anticipate a 55% chance of a cut at the next policy meeting, up from 40% last week, according to market reports. Bank of America analysts expect this to be followed by a further 25 basis point cut in October and December, dropping the key rate to 2.0%. Growing anticipations of BoC[46] easing this year are anticipated to influence the Canadian dollar, providing short-term support for the pair.

Some reports believe that a rise in crude oil prices would give the Canadian dollar, or Loonie, some credibility and curb returns on the currency pair. Investors anticipate that Canada is the top oil importer into the United States, thus high oil prices tend to increase the Canadian dollar value, as it is closely tied to its energy export and balance of trade with the United States.

---

Stay Ahead in the Currency Game

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.