The U.S. dollar experienced a decline against key currencies, including the euro and yen, on Thursday. This movement was influenced by slightly elevated inflation data for August and initial jobless claims that fell short of expectations, strengthening the perspective that the Federal Reserve is likely to initiate interest rate cuts in the upcoming week. During afternoon trading, the dollar experienced a decline of 0.3% against the yen, settling at 147.09 yen, whereas the euro appreciated by 0.4%, reaching $1.1738. Consequently, the dollar index, which gauges the greenback’s value relative to six major currencies, decreased by 0.3% to 97.51.

The euro experienced support due to reduced expectations for additional reductions in borrowing costs, following the European Central Bank’s decision to keep interest rates steady on Thursday as anticipated, while also expressing a positive outlook on growth and inflation. The U.S. economic data, however, emerged as the more significant driver of currency movements. Data indicated that U.S. consumer prices increased more than anticipated in August, with the annual inflation rise marking the most significant growth in seven months. The Consumer Price Index rose by 0.4% last month, following a 0.2% increase in July. Over the 12-month period ending in August, the Consumer Price Index rose by 2.9%, marking the most significant increase since January, following a rise of 2.7% in July. “The CPI fell short of market expectations. Ultimately, the biggest concern … is that the dovishness that comes with the weak jobs numbers is going to be unwound if CPI accelerates more than expected,” stated Eugene Epstein.

However, that did not truly come to fruition. While a softer CPI is desirable for many, it is important to note that the data does not significantly alter the trajectory or impact the Federal Reserve’s interest rates. Initial claims for state unemployment benefits increased by 27,000, reaching a seasonally adjusted total of 263,000 for the week ending September 6, according to the data. There were expectations of 235,000 claims for the most recent week. “For the first time in a long time, CPI is being overshadowed on its release day by another data series,” wrote Josh Jamner, senior investment strategy analyst. Stocks concluded the trading session on Wednesday with mixed results. The Dow experienced an increase of over half a percent, while the S&P 500 saw a decline of a tenth of a percent, and the Nasdaq fell by a third of a percent.

He observed that the rise in initial jobless claims to the highest level in four years had momentarily driven the 10-year Treasury yield below 4%, even in light of the larger-than-anticipated increase in the consumer price index. This dynamic highlights the Fed’s emphasis on the ‘maximum employment’ aspect of its dual mandate, with today’s inflation report not sufficiently strong, in our assessment, to prevent a 25 basis point interest rate cut at the upcoming FOMC meeting. Focus on the labor market has heightened following two disappointing U.S. jobs reports in recent days. The non-farm employment figure for August indicated a mere 22,000 jobs added, falling short of the anticipated 75,000, with payrolls also revised downward by 911,000 for the year concluding in March.
After Thursday’s data release, fed funds futures indicate a 91% probability of a 25 basis point cut this month, alongside a 9% probability of a 50 basis point reduction. The levels remained the same as they were late on Wednesday.

In other currency pairs, the euro appreciated by 0.2% against the yen, reaching 172.78 yen, while it remained stable against sterling at 86.14 pence. ECB President Christine Lagarde stated during a press conference following the bank’s decision to maintain interest rates at 2% that the euro zone remains in a “good place,” noting that inflation is aligned with the ECB’s targets. The euro is showing signs of stabilization following a two-day decline, amidst ongoing geopolitical tensions along the EU’s eastern border. Poland reported that it intercepted suspected Russian drones within its airspace on Wednesday, supported by aircraft from its NATO allies. This marks the first instance of a member of the Western military alliance engaging in active defense during Russia’s ongoing conflict in Ukraine.

In other markets, the dollar decreased by 0.5% against the Swiss franc, reaching 0.7956, while sterling appreciated by 0.4% against the dollar, rising to $1.3578. Additionally, it appears that the news regarding Stephen Miran’s advancement toward becoming a Fed governor has gone largely unnoticed, as it aligns with U.S. President Donald Trump’s initiative to gain more direct influence over interest rate policy. The Senate Banking Committee has moved forward with Miran’s nomination; however, lawmakers have indicated that it remains uncertain whether the process will be finalized in time for his participation in the upcoming meeting.