CAPITALDIGEST MARKET REVIEW, 09/02/2026

U.S. DOLLAR REBOUND TO BE CUT SHORT BY RATE CUT BETS, DOUBTS OVER FED INDEPENDENCE: REUTERS POLL

The U.S. dollar experienced a short-lived rebound in early February 2026, driven by speculation around Donald Trump’s potential nomination of Kevin Warsh as Federal Reserve Chair. However, analysts anticipate that this upward movement will not last due to mounting expectations of interest rate cuts by the Fed and growing concerns about the independence of the central bank. Warsh, a former Fed governor, is known for his moderate policy stance and his alignment with Trump’s calls for lower interest rates. His nomination could signal a shift in the Fed’s approach, raising questions about its ability to act independently of political pressures. Investor sentiment has been influenced by the possibility of rate cuts in 2026, which has already been partially priced into the market. The futures market is currently discounting nearly 90% of a rate cut by the end of the first half of the year. Analysts are watching closely how the markets react to Trump’s potential selection of Warsh. While some view the nomination as a positive sign for Fed independence, others worry that it could lead to greater political interference in monetary policy decisions. The dollar’s recent rise was also attributed to geopolitical tensions and comments from Trump about welcoming a weaker dollar. These statements have reinforced the perception that the administration supports policies that could weaken the currency. The yen has seen renewed weakness as hedge funds position for further declines ahead of Japan’s pivotal election this weekend. Prime Minister Sanae Takaichi’s advocacy for a weaker currency has led to increased bets against the yen. India’s rupee also showed signs of strength following a trade agreement with the U.S., which cut tariffs on Indian goods. Bank of America expects the rupee to strengthen further by the end of March 2026. The Indian government is preparing to unveil its 2026-27 budget, with key focus areas including fiscal deficit targets, capital expenditure, and debt reduction strategies. The budget is expected to reflect continued efforts to stabilize the country’s fiscal position while supporting economic growth. Meanwhile, SBI Holdings reported record revenue and profit figures for Q3 2025. The company’s strong performance was driven by strategic innovations in financial technology and international markets. The global financial landscape remains influenced by the U.S. dollar’s performance and expectations of Fed policy changes. With the dollar facing pressure from rate cut expectations, analysts are monitoring how these developments will affect other major currencies and financial markets.

STERLING RECOVERS SOME BOE-LED LOSSES, POLITICS LOOM LARGE

The pound rose on Friday, recovering some of the previous day’s steep slide that followed a surprisingly tight vote from the Bank of England to leave rates unchanged and its signal that it could cut if inflation continues to cool. Sterling rose 0.4% to $1.3581 by mid-morning in London, partially recovering from Thursday’s near-1% drop to 10-day lows. The pound strengthened against the euro, which dropped 0.2% to 86.88 pence, after having staged its biggest one-day rally against sterling since last August the previous day. The European Central Bank also met to set interest rates on Thursday, leaving them unchanged. But policymakers indicated they were in no hurry to lower borrowing costs, even as inflation runs below their 2% target. On top of the shifting outlook for interest rates, sterling traders, who are sticking with their view that the BoE will likely cut rates twice this year, are having to contend with a tricky political backdrop this week. Prime Minister Keir Starmer is under huge pressure, including from lawmakers in his own Labour Party, over the decision to make Peter Mandelson Britain’s ambassador to Washington in December 2024, when his ties to the late U.S. sex offender Jeffrey Epstein were already known. Concern about the vulnerability of his position drove a rise in gilt yields earlier this week that reversed after the BoE decision. “The market struggles to fully price two 25-basis point cuts this year – probably because of politics. Any leadership challenge to PM Keir Starmer and the presumed leftward shift in policy setting would leave the gilt market vulnerable and could delay a BoE easing cycle. Notably, 30-year UK gilt yields ended the day higher yesterday, despite the dovish BoE communication,” ING strategist Chris Turner said. “We see plenty of room for sterling to take the strain here and would look for EUR/GBP to now find support at 0.8670/80. Our bias over the next month is towards 0.88 as political pressure remains on Starmer and data slowly adds to the case for a March BoE rate cut,” he said.

POUND, UK BORROWING COSTS DROP AS INVESTORS UP BETS ON RATE CUTS AFTER DOVISH BOE

Sterling and UK government borrowing costs fell on Thursday, as investors quickly priced in a much higher chance of a near-term rate cut, after the Bank of England said it expected a future cut if inflation continued to slow. The decision to keep the bank rate at 3.75% was in line with expectations but the 5-4 vote split was a closer call, with an earlier Reuters poll having pointed to 7-2 vote split. “The vote split is a lot more dovish than expected. It’s what markets are reacting to,” said Kirstine Kundby-Nielsen, analyst at Danske Bank. The pound extended losses and hit a near two-week low against the dollar after the decision, and was last down 0.6% at $1.358. “A low inflation forecast has contributed towards easing some members’ concerns about inflation persistence,” said Philip Shaw, chief economist at Investec. “Our forecast has been that the MPC would keep rates on hold until the end of April, but we wouldn’t be surprised if that cut is brought forward,” he said. UK short-dated two-year gilt yields – which reflect short-term interest rate expectations – headed for their biggest one-day drop since last April, as bond prices rallied, dropping 9 basis points on the day to a three-week low of 3.63%.  After the BoE decision traders were pricing in nearly 50 bps of rate cuts by year-end, implying two more quarter-point reductions. This is up from 35 bps by year-end just before the BoE decision. “They have tweaked the cautious easing guidance by scrapping reference to a gradual downward path of the bank rate,” said Elias Haddad, senior markets strategist at Brown Brothers Harriman. The BoE has also slashed its inflation forecast to 1.7% – below its 2% target – and said it expects inflation to slide to reach that target in April, much sooner than in its early November forecast. UK 10-year gilt yields dipped 2 bps to 4.53%. The blue-chip UK FTSE 100 initially pared some earlier losses after the decision, but was last down 0.4% Sterling was weak during morning trading amid growing pressure on UK Prime Minister Keir Starmer over former U.S. ambassador Peter Mandelson’s ties to the late U.S. sex offender Jeffrey Epstein. “We’ve got twin problems for sterling today, obviously, with more rate cuts being priced and all the political risks,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

US DOLLAR HITS TWO-WEEK HIGH, POUND SLUMPS AFTER BOE HOLDS RATES

The U.S. dollar hit a two-week high on Thursday as fresh volatility gripped stocks and the pound tumbled after the Bank of England voted by a razor-thin margin to leave UK rates unchanged. The greenback found firmer footing this week as investors turned more risk-averse and financial markets assessed results so far in the U.S. corporate earnings season, now halfway complete. The dollar largely stayed range-bound after a run of softer U.S. labor data, including jobless claims rising more than expected and unexpectedly low job openings in December. “Now the issue is, to me, whether we go broadly sideways or is there a deeper dollar bounce in store for us,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “Because inflation is still a bit elevated and the economy is still solid, it seems to me that the Federal Reserve is not in a hurry to cut rates again, and that sets us up for when Warsh takes over.” Chandler added that markets expect softer data once Kevin Warsh, nominated as the next Federal Reserve chair, takes up his post. However, his confirmation may face hurdles, with some Republicans saying they will not proceed until an inquiry into current Fed Chair Jerome Powell is resolved. The dollar index, which measures the U.S. currency against a basket of six others, was last up 0.18% at 97.85, rising for a second day. It rose to its highest since January 23 earlier in the session. Gold and silver, which have become more volatile as a result of leveraged buying and speculative flows, were rocked by a fresh selloff on Thursday. Silver fell 15.66% to $74.25 an ounce. The Nasdaq Composite has fallen 2.9% over the past two days, its biggest slide since October, with volatility triggered by market bellwethers including Google parent Alphabet (GOOGL.O), opens new tab, which reported aggressive spending plans on Wednesday, and a rout in software stocks as they adapt to a new era of generative AI. Sterling was last down 0.75% against the dollar at $1.3550 and off 0.62% versus the euro, after the BoE left borrowing costs unchanged in a 5-4 split among the nine policymakers that make up its rate-setting committee. The pound, which fell to a two-week low, was under intense pressure all day from concern about the stability of the British government and whether Prime Minister Keir Starmer could survive the fallout from his decision to appoint Peter Mandelson as U.S. ambassador despite knowing about his ties to Jeffrey Epstein. “It was always likely that the PM could be fighting for his job after the May local election. Now it seems that a leadership challenger could come earlier,” said Jane Foley, head of FX strategy at Rabobank London. “The pound would be particularly unsettled if the Labour leadership went to the left wing of the Labour Party.” The European Central Bank also delivered no change in interest rates at its policy meeting on Thursday. The euro was last down 0.16% at $1.1788. Markets show traders see little chance of an ECB rate cut this year. Even with the volatility that has dominated markets since the start of the year, the euro is only about 0.4% above where it was when the ECB last met in December. However, the euro is 13% higher against the dollar than it was a year ago, which has added to concern among policymakers about the impact on regional price pressures, while inflation in the euro zone has fallen to around 1.7%, below the ECB’s target of 2%. In the crypto market, bitcoin hit its lowest since October 2024. It fell 11.65% to $64,162.66, its biggest one-day drop since November 2022. Ether slumped to a nine-month low, and was last down 12.4% at $1,862.

DOLLAR HEADS FOR WEEKLY RISE, YEN SLUMPS AHEAD OF JAPAN’S ELECTION

The dollar slipped from two-week highs on Friday, returning some safe-haven gains as risk assets rebounded from a deep rout driven by concerns over a surge in AI-related spending this year. Even so, the buck remained on track for a weekly rise and trimmed earlier losses against the Japanese yen after U.S. data showed consumer sentiment improving in February, despite lingering concerns about jobs and rising costs of living. Meanwhile, the yen is headed for its worst week against the dollar since October, wiping out most of January’s hefty gains as traders await Sunday’s national election. “What we are seeing is some correlation reversals,” said Dan Tobon, head of G10 FX strategy, Citi in New York. “Equities are up today, and so, as a result, you’re seeing a bit of dollar decline as all the high beta currencies really come back.”Top of Form Our chief editor shares analysis and picks of the week’s biggest news every Saturday. This service is not intended for persons residing in the E.U. By clicking subscribe, I agree to receive news updates and promotional material from Mediacorp and Mediacorp’s partners.Bottom of Form Global shares have seen their biggest weekly selloff since November, as investors fret about the massive spending on artificial intelligence as well as the cascading impact of fast-advancing AI tools that could upend various sectors.  The dollar index, which tracks the performance of the U.S. currency against six others, was down 0.34 per cent after earlier hitting a two-week peak. It was still up 0.5 per cent on the week, on pace for its largest weekly rise since early January. The catalyst for this week’s gain was President Donald Trump’s nomination last Friday of Kevin Warsh, who is not seen as a big advocate of steep rate cuts, as the next Federal Reserve chair. Fed Vice Chair Philip Jefferson said on Friday that he is “cautiously optimistic” about 2026, expecting slightly above-trend growth, a steadying job market, and inflation continuing toward 2 per cent, with current policy positioned to respond to both sides of the Fed’s mandate. Meanwhile, San Francisco Fed President Mary Daly sees the economy in a “precarious” spot. “Maybe the Fed is seeing something that we’re not. Maybe he (Jefferson) might be forced to change his tune in the next couple of months here,” said Matt Weller, global head of market research at StoneX, in Michigan. “If the NFP report confirms weakness in the labor market, I think that March could well be live for the Federal Reserve.” Traders are eyeing the delayed release of the U.S. nonfarm payrolls report for January, expected next week. Various measures of labour market strength this week have suggested the world’s largest economy is losing some momentum and traders are now pricing in a higher chance that interest rates will be cut within the first half of this year, rather than in the second. The yen slipped 0.04 per cent to 157.1 per dollar ahead of Sunday’s vote where a victory for Prime Minister Sanae Takaichi could be on the cards.  The vote has investors on edge because fiscal worries have sparked a stomach-churning selloff in the currency and bond markets, and a further leg lower would likely reverberate globally. For StoneX’s Weller, the big question is whether the election will be seen as a mandate for aggressive fiscal spending. “If it is indeed what we see, it’s likely that we’ll see continued gains in the Nikkei, continued weakness in the yen,” said Weller. “The relative weakness of the U.S. dollar over the past few weeks masks the even greater weakness that we are seeing in the yen. So, it seems like one of those trends that could accelerate into next week and beyond. And it will likely, at some point, in my view, force some direct action from authorities in terms of potentially intervening to buy some time.” The euro rose 0.37 per cent to $1.1822 after the European Central Bank left interest rates unchanged as expected on Thursday and played down the effect of currency fluctuations on its future decisions. Sterling recouped some of Thursday’s near 1 per cent slide and rose 0.65 per cent to $1.3614 and was headed for its worst weekly drop against the greenback since October 27. The Bank of England also kept rates on hold on Thursday in an unexpectedly narrow vote and said borrowing costs are likely to fall if an expected drop soon in inflation is sustained. In the crypto market, bitcoin rose 11.77 per cent to $70,547.28 after hitting its lowest since October 2024 at $60,017. It was still set for a decline of 7.5 per cent for the week.