By Laura Matthews and Sruthi Shankar

(Reuters) – The dollar fell against major currencies on Wednesday, helping the euro hit an eight-month high, as the U.S. Consumer Price Index showed inflation was falling, boosting expectations of imminent interest rate cuts by the Federal Reserve.

The US CPI rose moderately in July, with the annual raise in inflation slowing below 3% for the first time since early 2021, boosting expectations for an interest rate cut next month, albeit likely less aggressively than markets had expected.

The report adds to a gentle rise in producer prices in July, suggesting inflation is on the decline. That should give the Fed room to focus more on the labor market amid growing concerns about a acute slowdown.

“Today’s CPI is supportive as the Fed hits its 2.8% PCE target for the end of this year. It supports a cut in September, but one that is potentially more moderate than what the market has been thinking over the past week,” said Marvin Loh, senior global macro strategist, Stan Street (NYSE:).

“I think we have a weaker dollar trend as the dollar is still overweight in terms of investor positioning.”

The euro rose 0.4% against the U.S. dollar to $1.1031, surpassing a peak reached during last week’s market turmoil and marking its highest since Jan. 2. It fell 0.2% to 102.4.

Investors were widely expecting an interest rate cut in September ahead of the producer price data release, and after it was released, they increased bets on a significant 50 basis point cut from 53% the day before to 56%.

STERLING DIPS, KIWI SLIDES

Sterling failed to gain ground on the weaker dollar and was last down 0.02% at $1.2854 after data showed the rise in British consumer price inflation in July was smaller than expected as services prices (closely watched by the Bank of England) rose more slowly.

The pound fell against the euro, however, which rose 0.4% to 85.84 pence. Financial markets had priced in a 44% chance of a quarter-percentage-point BoE rate cut in September, up from 36% before the data was released.

The latest decline was 0.91% to 0.6022, after the Reserve Bank of New Zealand cut the rate by a quarter of a percentage point. It was the first cut since early 2020 and a year earlier than the Reserve Bank had forecast.

Meanwhile, analysts said Japanese Prime Minister Fumio Kishida’s decision not to seek re-election in his party’s leadership race next month had little impact on markets.

The yen last traded at 146.7 to the dollar.

“Evidence that high inflation is behind us continues to accumulate, setting the stage for aggressive easing of monetary policy around the world over the next year,” said Matt Weller, head of market research at StoneX. “With the dollar on track for its highest close of the year and a slump, the dollar could remain under pressure.”