Weekly currency forecast: Euro to weaken if Eurozone inflation slows?

The US dollar nosedived last week as a dovish speech by Federal Reserve Chair Jerome Powell stoked Fed interest rate cut speculation.

This week, the euro could face headwinds as the Eurozone’s latest consumer price index is expected to report inflation cooled sharply this month.

Pound

The pound was well supported against most of its peers last week amid a sense of UK economic optimism. This was supported by stronger-than-expected UK PMIs, which also saw GBP investors trim their bets for a Bank of England (BoE) rate cut in September.

Looking ahead, UK Prime Minister Keir Starmer will make a speech this week, in which he will warn of tough times ahead. His gloomy outlook could undermine the recent optimism in the UK and act as a headwind for the pound.

Euro

Trade in the euro was mixed last week. While EUR exchange rates were pressured by weaker-than-expected Eurozone PMIs, the single currency was able to attract some support thanks to its negative correlation with the US dollar.

The spotlight this week is likely to be on the publication of the Eurozone’s latest consumer price index. August’s preliminary figures are expected to report inflation in the bloc cooled to its lowest levels since July 2021. This is likely to stoke bets for a rate cut from the European Central Bank (ECB) next month and may place notable pressure on the euro.

US dollar

The US dollar plummeted to new multi-month lows last week in response to dovish signals from the Federal Reserve. This included Powell’s keynote speech at the bank’s annual Jackson Hole symposium in which he conceded that the ‘time has come’ for less restrictive US monetary policy.

Coming up, the US dollar may be able to claw back some of its recent losses later this week if the Fed’s preferred indicator for inflation, the core PCE price index, ticked higher in July.

Australian dollar

The Australian dollar trended broadly higher last week, with the risk-sensitive currency benefitting from the sharp drop in the US dollar. Although these gains were tempered by the minutes from the Reserve Bank of Australia’s (RBA) latest policy meeting as these downplayed the chances of another interest rate hike.

Likely driving movement in the ‘Aussie’ this week will be the publication of Australia’s latest monthly inflation figures. Inflation is expected to have cooled in July which may further weaken RBA rate hike bets and apply pressure to AUD exchange rates.