CAPITALDIGEST MARKET REVIEW, 18/08/2025

DOLLAR EDGES UP WITH US INFLATION REPORT ON TAP

The U.S. dollar firmed across the board on Monday, a day before the release of a U.S. inflation report that could help determine whether the Federal Reserve lowers borrowing costs next month. The dollar index was up 0.3% at 98.52 after last week’s 0.4% fall. Against the yen, the U.S. currency traded at 148.085, up 0.2%. Japanese markets were closed on Monday for the Mountain Day holiday. The euro was down 0.3% at $1.16123, while sterling was down 0.2% at $1.34335. “The buck is trading a little firmer against all peers, though the moves are overall modest in nature,” said Michael Brown, market analyst at online broker Pepperstone in London. “A very modest hawkish repricing of Fed policy expectations appears to be helping the move along, likely driven by participants squaring up some positions ahead of the risk that tomorrow’s CPI print presents,” he said. The dollar softened last week as investors adjusted their expectations for interest rate cuts from the Fed after soft data on U.S. jobs and manufacturing. Fed officials have sounded increasingly uneasy about the labor market, signaling their openness to a rate cut as soon as September. Cooling inflation could cement bets for a cut next month, but if signs emerge that U.S. President Donald Trump’s tariffs are fuelling price rises, that might keep the Fed on hold for now. “It’s important to note ahead of tomorrow’s data that the bar for a hawkish surprise is higher,” said Francesco Pesole, FX strategist at ING.  Pesole added that a 0.3% monthly rise in core CPI would give the Fed room to lower interest rates, given the deterioration in the labor market.  Economists polled by Reuters expect core CPI to have risen 0.3% in July, pushing the annual rate higher to 3%. Money market traders are pricing in around a 90% chance of a rate cut next month, while 58 basis points of easing are priced in by year-end, implying two quarter-point cuts and around a one-in-three chance of a third. The dollar was little swayed by Trump signing an executive order extending a pause in sharply higher U.S. tariffs on Chinese imports for another 90 days, a move that some market participants said was expected. With the United States and China seeking to close a deal averting triple-digit goods tariffs, a U.S. official told Reuters that chip makers Nvidia and AMD had agreed to allocate 15% of China sales revenues to the U.S. government, aiming to secure export licences for semiconductors.

POUND STRENGTHENS AFTER BRITISH JOBS DATA

The British pound, or the sterling, rose to $1.344 after UK payrolls fell just 8,000 in July, the smallest drop since January and far better than forecasts for a 20,000 decline. GBP/USD edging higher after the release of mixed UK labor market data and the latest US inflation figures. While signs of cooling employment growth in the UK were offset by robust wage gains, a softer US dollar following the CPI report helped keep the pair supported, as traders increased expectations that the Federal Reserve (Fed) will resume easing monetary policy as soon as September. Previous months’ losses were also revised lower, suggesting the labour market may be weathering the Labour government’s £26 billion tax hike better than expected. Job vacancies were at their lowest level since the three months to April 2021, when the UK was dealing with the effects of the Covid pandemic. Outside the pandemic, the last time that vacancies were lower was in the three months to January 2015. Liz McKeown, director of economic statistics at the ONS, said, “The number of employees on payroll has now fallen in 10 of the last 12 months, with these falls concentrated in hospitality and retail. “Job vacancies, likewise, have continued to fall, also driven by fewer opportunities in these industries.” Unemployment held at a four-year high of 4.7%, while private-sector wage growth eased slightly to 4.8% from 4.9% but remains well above the Bank of England’s comfort level for its 2% inflation target. The data underscores the BoE’s challenge in balancing sticky inflation with signs of labour market weakness after last week’s close vote to cut rates by 25 bps. Investors now look to Q2 GDP, expected to show just 0.1% growth. The US Consumer Price Index (CPI) rose 0.2% MoM in July, keeping the annual rate steady at 2.7%, in line with expectations. However, core CPI accelerated to 3.1% YoY from 2.9% in June, driven by higher housing, transport, and medical care costs. While the firmer core reading tempers prospects for aggressive Federal Reserve easing, markets still expect a September rate cut. The CME FedWatch Tool shows a 94% probability of a 25-basis point cut in September, up from 84% earlier in the day. On trade, President Trump extended the US–China tariff pauses by 90 days. Geopolitically, US President Trump and Russia’s Vladimir Putin will meet Friday in Alaska in an effort to broker a Ukraine peace deal. #Sterling Strengthens after U.S Inflation, UK Job Data.

DOLLAR SLIPS AS US INFLATION DATA BACKS SEPTEMBER RATE CUT

The dollar fell across the board on Tuesday after data showed that U.S. consumer prices increased moderately in July, leaving intact the case for a Federal Reserve interest-rate cut next month. The consumer price index rose 0.2% last month after gaining 0.3% in June, the Labor Department’s Bureau of Labor Statistics said on Tuesday. In the 12 months through July, the CPI advanced 2.7% after rising 2.7% in June. Economists polled by Reuters had forecast the CPI rising 0.2% and increasing 2.8% year-on-year. “Underlying inflation remains subdued, giving policymakers room for maneuver as they respond to signs of incipient weakness in labor markets,” Karl Schamotta, chief market strategist at Corpay, said. “Chair Powell should put a September cut on the table when he speaks at Jackson Hole on the 21st,” Schamotta said, referring to the Fed’s Jackson Hole Economic Symposium later this month. Currency markets had been in a holding pattern earlier as expectation grew that a moderate reading on U.S. price pressures could cement bets for a Fed rate reduction next month, which increased after last week’s soft payrolls data. “If the Fed moves ahead with back-to-back cuts, the policy rate differential with peers could narrow quickly, weighing on USD against higher-yielding currencies,” Fawad Razaqzada, analyst at Forex.com, said in a note. The euro erased earlier losses against the buck to trade up 0.4% at $1.16663. The greenback fell 0.3% against the Japanese yen to trade at 147.74 yen.

STOCKS HIT FRESH RECORD HIGH BUT US DOLLAR WEAKENS AS FED RATE CUT EXPECTATIONS GAIN MOMENTUM

World shares hit record highs on Tuesday after U.S. consumer prices data fueled expectations of an impending Federal Reserve interest rate cut in September, and a trade war truce between Washington and Beijing also buoyed sentiment. On Wall Street, the benchmark S&P 500 and the Nasdaq hit record highs after losing ground in the previous session. All 11 sectors on the S&P 500 advanced, led by stocks in communication services, technology and financials. The Dow Jones Industrial Average. DJI closed 1.10%, the S&P 500. SPX gained 1.13% and the Nasdaq Composite. IXIC advanced 1.39%. European stocks finished higher, rising 0.21%. MSCI’s gauge of stocks across the globe rose 1% to 947.66, hitting a fresh record high. U.S. Labor Department data showed that the consumer price index rose 2.7% in 12 months through to July, which was slightly below the 2.8% rate that economists polled by Reuters had forecast. “There was upside risk to inflation, and the market was bracing for that in some respects,” said James St. Aubin, chief investment officer at Ocean Park Asset Management in Santa Monica, California. “The report today, all things considered, was fairly benign. I don’t think there was anything to write home about, but it certainly took the worst-case scenario off the table.” Asian equities had rallied overnight after U.S. President Donald Trump signed an executive order pausing triple-digit levies on Chinese imports for another 90 days. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.18%. Markets on Tuesday traded on short-term relief, however, as the softer-than-expected consumer price data firmed up bets for U.S. rate cuts. Traders are pricing in a 94% chance of a Fed cut in September, up from nearly 86% a day ago and about 57% a month earlier, according to the CME FedWatch tool. Short-term U.S. Treasury bond prices rallied moderately, with the yield on two-year notes, which track interest rate expectations, down 2.3 bps at 3.731%. Longer-dated bond prices were lower. The yield on benchmark U.S. 10-year notes rose 1.4 basis points to 4.287% while the yield on 30-year notes rose 3.4 basis points to 4.8746%. In currency markets, the dollar weakened 0.25% to 147.77 against the Japanese yen and was down 0.71% at 0.807 against the Swiss franc. The euro rose 0.53% against the dollar at $1.1675. The pound rose 0.51% against the dollar to $1.3496 as traders anticipated the Bank of England will lag other non-U.S. central banks in implementing rate cuts. The BoE cut benchmark borrowing costs by a quarter-point to 4% last week after a tightly balanced vote between members of its monetary policy committee, who also broadly agreed that the risks of an upward wages-and-prices spiral remained present. Ten-year gilt yields were flat at 4.6186%. In commodities, spot gold prices were up 0.11% at $3,347.60 per ounce after dropping nearly 1.6% on Monday in response to Trump announcing there would be no tariffs on imported gold bars. [GOL/] Brent crude oil settled down 0.77% to $66.12 a barrel ahead of the August 15 meeting between Trump and Russian President Vladimir Putin, aimed at negotiating an end to the war in Ukraine. U.S. crude settled down 1.24% to $63.17 a barrel.

STERLING TICKS HIGHER AGAINST DOLLAR AS ECONOMY SLOWS LESS THAN EXPECTED

The pound rose to a fresh three-week high against the dollar on Thursday even as the greenback advanced against other major currencies, after UK GDP figures for July showed the economy slowing less than expected in the second quarter. At 0937 GMT, the pound was 0.1% higher at $1.135875, sitting at a three-week high against the dollar. Meanwhile, the dollar rose against the euro and Swiss franc. Against the euro, sterling rose 0.22% to 86.01 pence. Official figures published on Thursday showed Britain’s economy slowed less than expected between April and June after a strong start to the year, despite the shock of U.S. import tariffs and a weaker jobs market, offering help to finance minister Rachel Reeves in meeting her budget goals. Francesco Pesole, FX strategist at ING, said while the numbers were generally positive they matter more for gilts and for the government heading into the autumn budget. “The BoE hasn’t really looked at GDP numbers closely because they’re volatile and backward-looking, and they’re really looking much more closely at inflation and jobs.” UK labour data on Tuesday showed weakness in hiring but persistent wage growth, a headache for the Bank of England, which is faced with the tricky task of balancing a slowing economy and stubborn inflation. The next batch of inflation figures is due on August 20 after last month’s CPI figures for June showing UK inflation rising to 3.6% – its highest since January 2024. “The fact that policymakers are pondering how to respond to the challenging combination of a rather weak real economy and persistent inflation has bolstered the pound,” wrote Commerzbank analysts in a note. “…these doubts reinforce the view that the BoE is not leaning towards a dovish stance.” Money markets expect the BoE to hold rates steady at 4.25% at its next meeting on September 18.