CAPITALDIGEST MARKET REVIEW, 17/09/2024

US DOLLAR MIXED AFTER INFLATION REPORT SUPPORTS SMALLER FED RATE CUT

The U.S. dollar was mixed overall on Wednesday in choppy trading after data showed underlying inflation in the world’s largest economy rose in August, reinforcing expectations that the Federal Reserve will likely implement a smaller 25-basis-point interest rate cut option next week. The greenback posted gains against the Swiss franc, sterling, and yen, but slipped against the euro, nudging the dollar index, a measure of the U.S. unit’s worth against six major currencies , 0.01% lower on the day to 101.63. Earlier in the session, the dollar came under pressure as investors raised the chances that Democrat Vice President Kamala Harris would beat Republican rival Donald Trump in the Nov. 5 U.S. presidential election in the wake of a televised debate between the two candidates on Tuesday. Data showed that the U.S. consumer price index (CPI) gained 0.2% last month, matching the advance in July. In the 12 months through August, the CPI advanced 2.5%, the smallest year-on-year rise since February 2021 and down from a 2.9% increase in July. But excluding the volatile food and energy components, the CPI climbed 0.3% in August after rising 0.2% in July. “The immediate takeaway is that this dramatically reduces the likelihood of a 50-basis-point rate cut” next week, said Ben McMillan, a principal and the chief investment officer at IDX Insights in Tampa, Florida. “That wasn’t unexpected because I thought the market was pretty aggressive at pricing in a 50-basis-point rate cut in September anyway. This reaffirms what the Fed is really focused on – the jobs numbers. This makes the jobs numbers, and the revisions to those numbers, even more important.

STERLING SLIGHTLY UP AHEAD OF UK INFLATION DATA, BOE MEETING NEXT WEEK

The British pound was steady on Thursday after hitting a three-week low against the dollar the day before after data showed the UK economy stagnated in July, while focus turned to next week’s key inflation print and central bank meeting. Sterling was little changed on the day at $1.3052 and trading in a tight range, just above the $1.30025 it reached on Wednesday, its lowest since Aug 20. Data on Wednesday from Britain’s Office for National Statistics showed no change in economic output in July. A Reuters poll of economists had forecast a 0.2% month-on-month expansion. But while growth has stalled in Britain in recent months, the economy has still shown more robust growth than the euro zone since the beginning of the year. “If we look at the PMIs (purchasing managers’ indexes), we continue to see downside surprises for the euro area whereas you look at Britain and there are continued top side surprises,” said Kirstine Kundby-Nielsen, FX analyst at Danske Bank. Against the euro, the pound was also little changed at 84.4 pence before today’s European Central Bank (ECB)interest rate decision, where a quarter-point rate cut is widely expected. Meanwhile, the Bank of England meets next week, and futures markets imply around an 80% chance that interest rates remain on hold, after a 25 basis point rate cut in August. “I think they will only deliver one more cut this year,” Danske Bank’s Kundby-Nielsen added. “That will play an important role and is set to support the

CANADIAN DOLLAR WEAKENS AMID OVERSIZED FED RATE CUT UNCERTAINTY

The Canadian dollar edged lower against its U.S. counterpart on Friday as investors raised bets on an oversized interest rate cut from the Federal Reserve, a move which could raise speculation about the Bank of Canada easing in larger steps. The loonie was trading 0.1% lower at 1.3595 per U.S. dollar, or 73.56 U.S. cents, not far off the three-week low it touched on Wednesday at 1.3622. For the week, it was down 0.2%. The U.S. dollar fell against a basket of major currencies after media reports fueled the debate about the Fed beginning its interest-rate-cutting campaign with a half-percentage-point reduction, rather than a quarter-point move. “A half-point cut will weigh on the USD broadly but may also stoke expectations that the BoC could up the pace of easing, even if it is unlikely to at this stage,” Shaun Osborne, chief currency strategist at Scotiabank, said in a note. The Canadian central bank has cut three times since June, moving in quarter-point increments. Its benchmark rate is at 4.25%. Canadian consumer price index data for August, due on Tuesday, could also guide expectations for the pace of BoC rate cuts. Analysts forecast inflation slowing to an annual rate of 2.1% from 2.5% in July. Friday’s domestic data was more upbeat than expected. It showed wholesale trade growing by 0.4% in July from June, compared with forecasts for a 1.1% decline. Canadian bond yields eased across the curve, tracking moves in U.S. Treasuries. The 2-year was down 5.2 basis points at 2.950%, trading at its lowest level since August 2022.

STERLING GAINS AHEAD OF UK INFLATION DATA, BOE MEETING THIS WEEK

The British pound rose against the dollar on Monday, after closing slightly in negative territory last week, ahead of this week’s UK inflation data and central bank meeting. Sterling GBP=D3 rose by 0.5% on the day to $1.3190, above the $1.3125 it recorded at Friday’s close. “Sterling is holding up quite well,” said Niels Christensen, chief analyst at Nordea, with the general opinion being that the Bank of England would be “a little bit less aggressive” on rate cuts on account of an expected rise in core inflation. The BoE is widely expected to keep interest rates unchanged this week after a 25-basis-point cut last month, although futures markets on Monday implied a greater chance for a rate cut of a quarter of a point, at about 38% versus 20% on Friday. Inflation figures, released on Wednesday, will be a key set of data ahead of the BoE’s policy announcement, after data from Britain’s Office for National Statistics last week showed the economy stagnated unexpectedly in July. “The expected rise in the core rate is one of the reasons why we do not expect a change in the key rate,” said Volkmar Baur, FX strategist at Commerzbank. “However, if this does not happen, the BoE’s decision could become more difficult after the recent weaker economic data,” Baur added. The European Central Bank lowered interest rates by 25 basis points last week and signalled a “declining path” for borrowing costs in the months ahead as inflation slows and economic growth in the euro zone dwindles. Against the euro EURGBP=D3, the pound was flat at 84.35 pence. Meanwhile, the dollar weakened and the yen hit its highest level in more than a year on Monday, as market participants increasingly expected an oversized rate cut by the Federal Reserve later this week.

DOLLAR DRAGGED BY 50 BPS FED CUT WAGERS

The dollar traded near its lowest levels of the year on Tuesday, on the eve of the expected start to a U.S. easing cycle that markets are betting may begin with an outsized rate cut. The euro hovered around $1.1133 at 08:30 GMT, not far from the year’s high of $1.1201. The yen JPY=EBS eased back to 140.58 after a jaunt to the stronger side of 140 during holiday thinned trade on Monday. It has fallen the most this year so has the most room to rally on a dovish turn from the U.S. central bank. A sustained break of 140.00 would open the way to a low from last January at 127.215. Fed funds futures have rallied to push the chance of a 50 basis point rate cut to 69%, against 30% a week ago. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing. “Any sign of weakness in (Tuesday’s U.S. economic data) is only going to reinforce market speculation that there could be a 50 basis points move,” said Jane Foley, senior forex strategist at Rabobank. August U.S. retail sales and industrial production figures are expected later today, although all eyes are on the Fed’s two-day meeting which concludes on Wednesday. “Regardless of which of -25bps or -50bps the (Fed) goes with on Wednesday, we do think that the Fed’s messaging will be ‘dovish,'” said Macquarie strategists in a note to clients. “The USD could weaken against the majors on a very dovish tone, even with a -25bp cut … the largest losses, if any, are still likely to be experienced against the JPY,” they said.