Markets await US federal reserve clarity
BENGALURU: The US dollar regained some ground on Wednesday after a series of declines that pushed it to its lowest level in over a year. Investors are closely monitoring upcoming economic data that could influence the US Federal Reserve’s policy direction in its September meeting.
The foreign exchange markets have been turbulent this month, with concerns about a potential US recession and strong signals from the Bank of Japan (BOJ) contributing to the dollar’s volatility. These factors have bolstered other major currencies at the dollar’s expense.
The dollar index, which tracks the greenback against a basket of other currencies, rose by 0.42 per cent to 100.96 on Wednesday. Despite the rebound, it is still on track for its steepest monthly decline since November 2023, having hit a 13-month low of 100.51 in the previous session due to shifting expectations around Federal Reserve interest rate cuts.
“The market has rapidly priced in a terminal rate close to 3per cent , even though current rates are above 5per cent,” said Ed Hutchings, head of rates at Aviva Investors. “This may lead to a temporary pause in the dollar’s decline and could even push yields higher.”
Meanwhile, market participants are also anticipating earnings results from AI chip giant Nvidia, whose recent performance has captivated Wall Street. The dollar’s sensitivity to equity market movements has been particularly evident this year.
Speculation is growing that the Federal Reserve will begin cutting interest rates next month, following a dovish signal from Chair Jerome Powell last week. The key question now is whether the cut will be a substantial 50-basis-point reduction.
According to the CME Group’s Fedwatch Tool, the probability of a larger rate cut has increased to 35 per cent, up from 29 per cent a week ago. Markets currently expect more than 100 basis points of easing by the end of the year.
Later this week, a preliminary estimate of US gross domestic product (GDP) for the second quarter is expected, alongside the core personal consumption expenditures (PCE) index, which the Federal Reserve uses as its primary inflation gauge.
However, as the focus shifts from inflation to the broader economic outlook, the significance of this week’s PCE data is “debatable,” according to Matt Simpson, senior market analyst at City Index. “Only a strong upside surprise could alter the prevailing expectation of multiple Fed rate cuts.”
Given that markets have been anticipating rate cuts from September onwards, the downward pressure on the dollar appears to be diminishing, with key support levels forming around 100.18/30, Simpson added.
As the dollar stabilised on Wednesday, the British pound slipped 0.3 per cent to $1.3216, after reaching its highest level since March 2022 at $1.3269 on Tuesday. Traders are betting that the Bank of England will take a more cautious approach to monetary easing compared to the Federal Reserve. The euro also fell 0.5 per cent to $1.11295, remaining close to a 13-month high reached earlier in the week. Investors are awaiting euro zone inflation data for August, which could offer insights into the European Central Bank’s future policy moves.
Japan’s yen continued to ease off Monday’s three-week high of 143.45 against the dollar, trading 0.2 per cent lower at 144.30 per dollar.
The Australian dollar touched an eight-month high after data showed that domestic inflation slowed to a four-month low in July. However, the overall progress in controlling price increases was disappointing, and the currency slipped slightly to $0.6787. In the cryptocurrency market, bitcoin fell 3.1 per cent to $59,954 after an earlier drop of over 6 per cent, marking a oneweek low.