Soft US Inflation Data Could Weaken Dollar and Boost Risk Assets

The US dollar's strength is expected to soften if the upcoming July CPI release shows lower inflation rates, according to ING's analysis. If the data comes in as predicted, with a month-on-month headline reading of 0.1% and core at 0.2%, it could shift market expectations away from a September rate hike by the Federal Reserve. This would lead to a benign decline in the dollar and support risk assets.

The US yield curve is expected to steepen, which could see the dollar soften further, particularly against procyclical currencies. However, ING's rates strategy team warns that the long end of the curve may face pressure from the fiscal side due to deteriorating US budget deficits on tariff rebates.

In the eurozone, the EUR/USD pair is trading in a lackluster fashion despite better-than-expected economic data and hard activity numbers. This is partly due to unresolved tensions in the Gulf, which are keeping European natural gas prices high.