The US dollar ended last week under pressure after softer inflation and an unexpected fall in retail sales reduced expectations of another near-term Federal Reserve rate increase. Sterling gained support from stronger UK growth, while renewed tension between the United States and Iran pushed oil prices higher and kept global inflation risks in focus.
This week, traders face another concentrated calendar. UK employment, inflation and retail sales could drive several separate moves in the pound. Federal Reserve meeting minutes may reshape expectations for US interest rates, while Canadian inflation and global business surveys could affect CAD, EUR and other major currencies.
Last Week’s Main Market Driver: US Rate Expectations
The most important forex story was not any single inflation number. It was the change in expectations for US monetary policy.
The Consumer Price Index (CPI), which measures changes in prices paid by households, increased 0.1% in July and 3.4% from a year earlier. Core CPI, which excludes food and energy, rose 0.2% during the month and 2.5% annually.
Producer prices also showed limited monthly pressure. The Producer Price Index (PPI), which measures prices received by businesses, was unchanged in July. Services prices rose 0.2%, while goods prices fell 0.7%. However, producer prices were still 4.7% higher than a year earlier, showing that the longer-term inflation picture remained mixed.
These releases gave the Federal Reserve less immediate reason to raise rates, but Friday’s retail-sales report produced the clearest market reaction. US retail sales fell 0.6% in July, their first monthly decline in nine months. Core retail sales, which are used in economic-growth calculations, fell 0.4%.
The weaker consumption data reinforced concerns created by the previous week’s poor US employment report. Market pricing for a September Federal Reserve rate increase fell from approximately 52% early in the week to 31% by Friday.
That shift reduced the expected interest-rate advantage of the dollar. The US Dollar Index fell 0.25% on Friday to 99.67. EUR/USD reached $1.1585, its highest level since June 17, while GBP/USD touched $1.3561, its highest level since May 12.
Stronger UK Growth Supported Sterling
UK gross domestic product (GDP), a measure of total economic output, grew 0.4% in the second quarter after expanding 0.6% in the first quarter. Services increased 0.5%, construction grew 0.3% and production was unchanged.
The result helped sterling finish the week higher against both the dollar and euro. UK bond yields also remained relatively high, making sterling more attractive to investors seeking currencies with higher interest-rate returns.
The euro area also recorded quarterly GDP growth of 0.4%. Employment increased only 0.1%, however, suggesting that the improvement in output had not yet produced a strong acceleration in hiring.
Oil Was the Main Geopolitical Risk
Stalled US-Iran negotiations and the possibility of an extended naval blockade increased concern about energy supplies through the Strait of Hormuz. The route carries roughly one-fifth of global oil and liquefied natural gas shipments.
Brent crude ended Friday near $88.50 per barrel, while US crude traded around $82.81. Higher energy prices created two opposing forex effects. They supported some oil-exporting currencies, but they also increased inflation and trade-balance risks for major energy importers.
For central banks, this means softer economic growth cannot be viewed separately from energy-driven inflation. That tension may keep interest-rate expectations unstable.
What Could Affect Forex Markets This Week?
1. UK Data Could Drive GBP/USD
The UK publishes employment and wage data on August 18, CPI and producer prices on August 19, and retail sales on August 21.
Wages and inflation are especially important because they influence expectations for Bank of England policy. Persistent inflation could keep UK interest rates elevated for longer. Softer inflation, weaker earnings or poor retail activity could reduce that expectation.
Because the pound is also benefiting from weaker US rate expectations, GBP/USD may react to both sides of the pair throughout the week.
2. Federal Reserve Minutes Could Reprice the Dollar
Minutes from the Federal Open Market Committee’s July 28–29 meeting are scheduled for August 19. The minutes provide a detailed record of policymakers’ discussion.
Markets may examine how many officials were concerned about inflation and whether support for another rate increase was broad before the latest weak employment and retail-sales reports. A more inflation-focused discussion could partly restore expectations of higher US rates. Greater concern about growth or employment could reinforce the recent pressure on the dollar.
US housing, industrial-production and business-activity figures may provide additional evidence about the economy’s direction.
3. Canadian Inflation May Move USD/CAD
Canada’s July CPI is scheduled for August 17. The result may affect expectations for Bank of Canada policy and therefore USD/CAD.
Canada is also exposed to two competing forces. Higher oil prices can improve export income, but a possible 50% US tariff on Canadian goods represents a serious growth risk. Negotiations and tariff headlines may therefore produce CAD volatility even if the inflation data are close to expectations.
4. Japan and Global Business Surveys Matter for JPY and EUR
Japan’s economy grew at an annualised rate of 1.1% in the second quarter, below market expectations. The yen nevertheless strengthened slightly because traders continued to reduce expectations of another Federal Reserve increase.
Flash Purchasing Managers’ Indexes (PMIs), early surveys of business activity, begin arriving on August 21. These reports may show whether growth is improving or losing momentum across major economies. Readings above 50 normally indicate expansion, while readings below 50 indicate contraction.
Forex Pairs in Focus
GBP/USD: The week’s most concentrated event risk. UK employment, inflation and retail sales meet an important reassessment of Federal Reserve policy.
EUR/USD: Sensitive to the gap between US and euro-area rate expectations. Softer US data supported the pair last week, but global growth and energy risks remain relevant.
USD/CAD: Canadian inflation, oil prices and tariff negotiations create three separate drivers that may pull the pair in different directions.
USD/JPY: The pair remains sensitive to US yields, Bank of Japan expectations and possible concern about excessive yen weakness.
Market Summary
Last week’s dominant theme was the loss of part of the dollar’s expected interest-rate advantage. Moderate US inflation started the shift, but weak retail sales created the strongest reaction.
This week’s central question is whether incoming data and Federal Reserve minutes confirm that policy shift. UK releases make GBP/USD the clearest pair for event-driven volatility, while the Iran conflict and possible US tariffs on Canada remain the largest external risks.
No single outcome is certain. Markets may continue to move quickly as traders balance slowing growth against inflation pressure from energy and trade restrictions.
