The Euro weakened against the Dollar on Thursday after German inflation data prompted investors to anticipate a possible easing of the European Central Bank's interest rates.

Preliminary data released on Thursday indicated a decline in inflation across six major German states in August, hinting at a potential significant drop in national inflation this month.

In addition, inflation in Spain slowed to its lowest rate in a year. 

As a result, the Euro fell by 0.4% to $1.1077, down from $1.1128 before the German data was released. The single currency had reached a 13-month high of $1.1201 on Friday.

Money markets have adjusted their expectations for European Central Bank rate cuts to 67 basis points in 2024, up from approximately 63 basis points before the data was released, Reuters reports.

Investors are now awaiting the release of the US core personal consumption expenditures (PCE) price index on Friday, which is the Federal Reserve's favoured inflation gauge and could offer insights into future US interest rate trends.

Furthermore, there is caution surrounding the Euro ahead of elections in Germany's three eastern states, where two parties, one far-right and one economically far-left, are projected to secure between 40% and 50% of the vote.

“The results from Thuringia may come as a negative shock to Euro watchers, who have tended to be sensitive to political developments that point to uncertain political outlooks on the continent,” according to Thierry Wizman, global forex and rates strategist at Macquarie.

Thuringia and Saxony vote on 1st September and Brandenburg on the 22nd.

“Possible consequences include drastic changes in regional policies, a break-up of the national coalition, a change in national fiscal policy and a reorientation of Germany's EU and foreign policy, in descending order of likelihood,” stated Christian Schulz deputy chief European economist at Citi.

In the broader market, the Dollar strengthened following the German data, recovering from a dip on Wednesday.  

Despite this recent rise, the greenback has still declined about 2.9% so far this month, putting it on course for its most significant monthly drop in nine months.

The Dollar index, measuring the currency against six rivals, was up 0.28% at 101.29 after dropping to a 13-month low of 100.51 on Tuesday.