CAPITALDIGEST MARKET REVIEW, 01/09/2025

DOLLAR CLINGS TO GAINS WITH FOCUS ON FED POLICY AS FRENCH POLITICS CLOUD EURO

The dollar clung to gains against the euro and the yen on Wednesday, paring much of the strength made earlier in the day as investors focused on upcoming U.S. economic data for policy cues, even as worries persist over the Federal Reserve’s independence. The euro touched its weakest level since August 6 and was last down 0.09% at $1.1631. Sterling eased up 0.12% to $1.3496, while the dollar slipped against the Swiss franc 0.14%, and was flat versus the Japanese yen at 147.445. In U.S. afternoon trading, the dollar index, which measures the greenback against a basket of currencies, alternated between gains and losses and was last up 0.02% at 98.227. “Traders are largely in a holding pattern as we await key earnings today from Nvidia and core PCE on Friday,” said Michael Boutros, senior technical strategist at StoneX. “Its unlikely traders will want to take on any significant new exposure into the monthly cross until we get through these data points.” New York Fed President John Williams said on Wednesday it is likely interest rates can fall at some point, but policymakers will need to see what upcoming data indicate about the economy to decide if it is appropriate to make a cut at next month’s meeting. Although the dollar appears to have shaken off the immediate worries over Fed independence that followed U.S. President Donald Trump’s attempt on Monday to fire Governor Lisa Cook, the U.S. Treasury yield curve has steepened. Cook’s lawyer later said she would file a lawsuit to prevent her ouster, kicking off what could be a protracted legal fight. “I don’t think the markets are very concerned about the drama with Ms. Cook and the Fed. They are a little more concerned about what Donald Trump has been saying about wanting lower rates,” said Joseph Trevisani, senior analyst, FX Street. “If the Fed starts to move on interest rates, the U.S. economy will pick up strength, and that is going to end up supporting the dollar.” Since his return to the White House this year, Trump has relentlessly pressured the central bank to lower interest rates. Money markets are pricing in a 87.2% chance of a 25-basis point rate cut in September, according to the CME’s FedWatch tool. Elsewhere, political developments in France are the focus for the euro as Prime Minister Francois Bayrou battles to save his minority government ahead of a September 8 confidence vote over budget cuts. Many French people want new parliamentary and presidential elections; opinion polls showed on Wednesday. “There was a lot of concern about European politics, but I think that the some of those concerns have abated. The market is more comfortable with the politics in Europe than anyone expected even six or eight hours ago,” said Steven Englander, head of global G10 FX research, Standard Chartered Bank. Investors will next week examine U.S. labour market and business survey data for clues on the future path of Fed policy. Meanwhile, they will be keeping an eye on U.S. personal consumption expenditure data later this week, which if it “comes in as expected, I’m pretty sure the Fed is going to move (on a rate cut),” said Trevisani. French government bonds steadied on Wednesday, a day after the yield on the 10-year benchmark bond climbed to its highest level in five months. Meanwhile, preliminary data released on Wednesday showed that British producer output price inflation rose to a two-year high of 1.9% in June, up from 1.3% in May, adding to signs of inflationary pressures in the economy.

DOLLAR WEAKENS AS SEPTEMBER FED CUT BETS GROW

The dollar weakened against major currencies on Thursday, as traders added to bets that the Federal Reserve will cut interest rates next month after New York Fed chief John Williams signaled such a move was possible. The U.S. currency has been under renewed pressure from President Donald Trump’s ramped-up campaign to exert more influence over monetary policy, and as he attempted to fire Lisa Cook, one of the Fed’s governors. Cook filed a lawsuit on Thursday, claiming Trump has no power to remove her from office. Although the dollar did trim some of its losses after Thursday’s data showed improvement in jobless claims and gross domestic product expanding slightly more than expected, it was still treading water in U.S. afternoon session as traders await other critical pieces of data. “It’s not a picture of an economy that’s about to weaken significantly,” said Francesca Fornasari, head of currency solutions at Insight Investment. “Everything, ultimately, is going to hinge on what the Fed does, and non-farm payrolls. I suspect next week’s number is going to be quite closely watched.” The currency fell against the euro even after France’s prime minister on Monday unexpectedly called a confidence vote for next month, which looks likely to result in the fall of his minority government. The euro was 0.43% higher at $1.1688. Sterling also rose 0.13% to $1.3516. Williams said in a CNBC interview on Wednesday that it was likely rates can fall at some point but policymakers must see what upcoming data indicate about the economy to decide if a cut at the Fed’s September 16-17 meeting is appropriate. Key among data releases before that meeting is the PCE price index on Friday – the Fed’s preferred inflation measure – and the monthly payrolls report a week later. Traders currently lay around 85% odds of a quarter-point rate cut next month, according to CME’s FedWatch tool. “We’re all pretty keenly focused on where the labor market at the moment is, and how is that going to feed into the Fed at a moment when it seems like they’re at a transition point back towards the easing cycle,” said Brian Daingerfield, head of G10 FX strategy, NatWest Markets. “The details of the non-farm payroll report, to me, feel like that’s going to be the moment at which tips the balance in one way or the other.” A selloff in AI-related stocks Friday weighed on the market, with the Dow closing down two-tenths of a percent, the S&P 500 shedding more than Trump’s push to place hand-picked, dovish-leaning candidates on the central bank’s decision-making committee also pulled short-term yields lower, even though his attack on Governor Cook could spark a protracted legal battle after she sued to keep her job. The dollar index, which gauges the currency against six major peers, was last trading down 0.34% at 97.830, following two days of declines. Against the yen, the dollar fell 0.40% to 146.815 yen. Japan’s chief trade negotiator Ryosei Akazawa canceled a trip to Washington at the last minute on Thursday, delaying an announcement of the details of Japan’s $550 billion investment pledge in the United States as part of a tariff deal. A government spokesperson said the decision was taken after talks with the U.S. side revealed some points that need further discussion “at the administrative level”. The dollar slipped to its lowest level against China’s offshore yuan since November, last down 0.46% to 7.1190 yuan in offshore trading.

STERLING RISES AGAINST WEAKENING DOLLAR AS TRADERS FOCUS ON FED/TRUMP

Sterling edged up against a weakening dollar on Thursday as traders continued to worry about threats to the U.S. central bank’s independence. The pound was 0.17% higher on the day at $1.3502 and set for a 2.4% monthly rise against the dollar in September. The U.S. currency has been under pressure from President Donald Trump’s ramped-up campaign to exert more influence at the Federal Reserve. Fed Governor Lisa Cook asked a U.S. judge to issue a temporary order declaring that Trump’s effort to fire her is unlawful and to bar the Fed from taking steps to remove her. Sterling has also had some support by a pullback in expectations of rate cuts by the Bank of England and buoyant economic data. Money markets expected the BoE to keep rates unchanged at 4% when it meets in September. BoE Monetary Policy Committee member Catherine Mann said on Tuesday that she saw a strong case to keep the Bank Rate on hold for a prolonged period but stood ready to cut rates forcefully if downside risks to growth materialise. “Since the beginning of the year, the pound has tended to move sideways against the G10 currency average, while the U.S. dollar has depreciated significantly,” said Michael Pfister, FX analyst at Commerzbank, mentioning concerns about the independence of the Fed as bad news for the dollar. Commerzbank has changed positioning around sterling saying in a note on Thursday that the risks of a weaker pound are increasing amid a difficult upcoming autumn budget, persistent UK inflation and cooled-down labour market. “The latest data makes it clear that the United Kingdom is in a difficult situation, and our previously rather optimistic view of the pound is probably no longer justified,” Pfister said. British producer output price inflation rose to a two-year high of 1.9% in June, up from 1.3% in May, according to preliminary official data released on Wednesday, which adds to signs of inflationary pressures facing the British economy. Earlier this month the BoE revised up its near-term inflation forecast to 4% for September and forecast that inflation would not be back at its 2% target until the second quarter of 2027.

DOLLAR TRADES LOWER WITH FED CUT IN VIEW, ON COURSE FOR MONTHLY DROP

The dollar weakened against the euro and Swiss franc on Friday, on course for a 2% decline in August against a basket of currencies, as traders prepared for a U.S. interest rate cut by the Federal Reserve next month. The dollar, which initially firmed after U.S. inflation data came in as expected, later gave up gains, failing to break a three-day losing streak. The U.S. Commerce Department reported on Friday that its Personal Consumption Expenditures (PCE) Price Index rose 0.2% last month after an unrevised 0.3% rise in June. The data keeps the Fed on track for a widely expected rate cut at its upcoming meeting on September 16-17. Money markets are pricing in an 87% chance of an easing, up from 63% a month earlier, CME’s FedWatch tool showed. The dollar index, which measures the greenback against a basket of currencies, was down 0.09% at 97.803 in afternoon trading. “FX markets remain range bound as investors await the next U.S. labor market report on September 5th,” said Dan Tobon, head of G10 FX strategy at Citi. Weak consumer sentiment continues to hang over an anxious market, which is rebalancing and hedging portfolios at month’s end after U.S. equities rallied throughout August, said Uto Shinohara, senior investment strategist at Mesirow Currency Management. Moreover, U.S. President Donald Trump’s campaign to exert more influence over monetary policy, including this week’s attempt to fire Fed Governor Lisa Cook, has weighed on the dollar. A federal judge said on Friday she would set an expedited briefing schedule in Cook’s bid to temporarily block Trump from firing her while she pursues a lawsuit that says he has no valid reason to remove her. “Market instability remains in focus, further fueled by media coverage surrounding Fed Governor Cook’s hearing regarding her contested dismissal,” Shinohara said. Trump is trying to reshape the Fed after repeatedly criticizing the central bank and its chair, Jerome Powell, for not cutting interest rates. Fed Governor Christopher Waller, who is said to be under consideration by Trump to succeed Powell as the Fed chair, said on Thursday he wanted to start cutting rates next month and “fully expects” more rate cuts to follow to bring the central bank’s policy rate closer to a neutral setting. “Interestingly, the FX reaction function to policy announcements and developments with the Fed seems fairly muted – this could be a function of illiquid summer markets,” said Citi’s Tobon. “Or it could be a function of markets expecting any changes at the Fed will lead to a cutting cycle similar to what is already priced. That reinforces our view it will be all about the data.”

STERLING ON COURSE FOR MONTHLY RISE AGAINST DOLLAR BUT FISCAL RISKS LINGER

Sterling slipped against the dollar and euro on Friday amid concerns over Britain’s fiscal position but remained on track for a monthly gain against the U.S. currency. The pound was 0.3% lower on the day at $1.3464 and was down about the same amount against the euro. Over the month, though, sterling was on course to rise about 2% against the dollar, while declining slightly against the euro. An influential think tank recommended on Friday that the UK government could begin taxing banks based on their Bank of England reserves. Weakness in the pound coincided with a decline in British bank shares and an uptick in benchmark Gilt yields on Friday. British bank shares were the worst performers on the STOXX 600 (.STOXX), opens new tab index of large European companies, while the yield on the benchmark 10-year Gilt rose 3 basis points to 4.73%. “All in all, it’s highlighting the potential downside risks for the pound from the government’s fiscal position,” said Lee Hardman, senior currency analyst at MUFG. A pullback in expectations for rate cuts by the Bank of England and buoyant economic data have supported sterling this month. Analysts reckon that fiscal developments are likely to stay in focus for the currency going ahead. British finance minister Rachel Reeves is widely expected to increase taxes again after raising them on employers in her first budget last year. Elsewhere, the dollar was steady against a basket of major currencies at 97.99 as investors awaited the U.S. PCE price index report, the Fed’s preferred inflation measure, later on Friday for cues on the future path of monetary policy. Money markets are currently pricing in an 85% chance of a U.S. rate cut next month.