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Dollar continues to weaken after soft CPI; sterling gains despite GDP drop - The U.S. dollar drifted lower in early European hours Thursday, continuing to fall after softer-than-expected U.S. inflation raised expectations of an early end to the Federal Reserve’s monetary tightening.

At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 100.125, after falling around 1.2% on Wednesday, its biggest fall since November, to its lowest level since April 2022.

Soft U.S. CPI release hits the dollar

The dollar has been weak for a few weeks, but had its worst session in five months on Wednesday after U.S. annual CPI fell to 3% in June, a drop of a full percentage point from last month, and core inflation came in at 0.2% in June against market expectations for 0.3%.

This result raised expectations that the interest rate hike of 25 basis points priced into the Fed meeting later this month will be the last, potentially allowing the U.S. economy to have a 'soft landing', boosting risk appetite to the detriment of the dollar.

The result of the inflation report "is consistent with our view that Fed tightening is in its final innings," said analysts at Goldman Sachs, in a note.

Sterling climbs despite GDP contracting

GBP/USD rose 0.2% to 1.3013, trading near a new 15-month high even though data showed that the U.K. economy contracted in May, raising the possibility of a recession later in the year.

The country’s gross domestic product fell 0.1% in May from April, following growth of 0.2% in the previous month, better than the contraction of 0.3% expected.

Yet, despite these weak numbers, with U.K. inflation running at the highest rate of any major economy, the Bank of England is expected to continue its tightening cycle when it next meets.

ECB publishes June policy minutes

EUR/USD rose 0.2% to 1.1149, marking a fresh 15-month high, with French inflation confirmed at 4.5% in June on an annual basis, a drop from 5.1% the prior month.

The European Central Bank publishes the minutes from its June policy-setting meeting later in the session, but its officials have been pretty clear that another rate rise is coming this month so the meeting’s account is unlikely to have much of an impact.

Elsewhere, USD/JPY fell 0.1% to 138.31, with the yen trading close to a two-month high against the dollar, the risk-sensitive AUD/USD rose 0.6% to 0.6830, while USD/CNY traded largely unchanged at 7.1659, with the yuan weighed by disappointing trade data.

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