The important inflation statistics released on Wednesday could give the euro's emerging recovery its own hawkish push, which could restrain the dollar's future advances.
Falling gas prices have assisted in reversing falls in the common currency, while the Federal Reserve's adamant desire to combat inflation at Jackson Hole has strengthened discussions of the same nature among members of the European Central Bank. Over 1% has been added to the euro since its two-decade low on August 23.
The euro has a significant impact on the overall direction of the greenback, accounting for 31% of the Bloomberg Dollar Spot Index and nearly 60% of the ICE equivalent. Any currency rally will help to deflate the dollar's post-Jackson Hole rally.
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Analysts warn that the euro may not have reached its trough due to persistent risks that a Russian gas cutoff will plunge the region into deep recession. This scenario could severely limit the ECB's ability to raise interest rates, which it has yet to do. It is expected to raise benchmark rates by 25 basis points at its next policy meeting on July 21, and to announce a larger hike in September.
Since the beginning of the year, the euro has lost more than 10% of its value against the US dollar, on fears that a sharp economic slowdown in the eurozone will leave the European Central Bank's interest rates far below those of the Federal Reserve.
The Fed, on the other hand, has raced ahead, most recently with a massive 75 basis point move, which some analysts predict will be repeated this month.
Francois Villeroy de Galhau, a member of the Governing Council, is one of the decision-makers who has highlighted this issue. He warned that the central bank "would carefully monitor movements in the effective exchange rate, as a significant driver of imported inflation," earlier this year.
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