The U.S. dollar softened on Thursday, while the euro hovered near an eight-month high, buoyed by data showing a slowdown in U.S. inflation. This trend has reinforced expectations that the Federal Reserve might lower interest rates next month.
The yen remained stable at 147.26 per dollar following data revealing that Japan's economy grew at an annualized rate of 3.1% in April-June, exceeding forecasts, driven by a robust increase in consumer spending. $USDJPY
In the U.S., the consumer price index (CPI) data released on Wednesday aligned with expectations, showing moderate growth and bringing the annual inflation rate below 3% for the first time since early 2021. This data, along with a slight increase in producer prices in July, suggests that inflation is gradually easing, though traders are now less optimistic about the extent of the Fed's potential rate cuts.
Josh Chastant, a portfolio manager for public markets at GuideStone Funds, noted that both the CPI and PPI data indicate the likelihood of a 25 basis point cut by the Fed in September. He added, "Much will depend on the tone of the minutes and the post-meeting press conference, but markets may be somewhat disappointed if we only see a 25bps reduction."
Current market pricing suggests a 64% chance of a 25 basis point cut next month and a 36% chance of a 50 basis point reduction, according to the CME FedWatch tool. At the beginning of the week, traders were evenly split between the two options, following last week's market downturn. Overall, markets are predicting a total of 100 basis points in cuts from the Fed this year.
Kyle Chapman, an FX markets analyst at Ballinger Group, remarked, "The green light for rate cuts is clearly on, and the Fed is gathering the disinflationary evidence needed to move forward confidently." However, he cautioned that a 50bps cut might be a more drastic measure, likely prompted by a significant growth scare.
The euro remained steady at $1.10110 in early trading, close to its peak of $1.10475, the highest level since January, which it reached on Wednesday. The euro is up 0.86% for the week, on track for its strongest weekly performance in over a month. $EURUSD
Sterling showed little movement, holding at $1.2826 after a slight dip on Wednesday. This followed a softer-than-expected reading on UK consumer price inflation, which has reinforced expectations of further interest rate cuts from the Bank of England this year. $GBPUSD
The dollar index, which measures the U.S. currency against six major rivals, was last recorded at 102.6, close to the eight-month low of 102.15 it reached last week. The index is heading for its fourth consecutive week of declines, a streak last seen in March-April 2023.
Investors are now turning their attention to the U.S. retail sales data due later on Thursday.
In other developments, the yen edged away from the seven-month high of 141.675, which it reached during last week’s market turbulence. Investors continue to digest the news of Japanese Prime Minister Fumio Kishida’s decision to step down next month, although analysts suggest the market impact has been minimal.
The New Zealand dollar remained largely unchanged at $0.5997, following a more than 1% drop in the previous session after the Reserve Bank of New Zealand reduced its cash rate by a quarter-point, marking its first rate cut since early 2020. $NZDUSD
Meanwhile, the Australian dollar held steady at $0.6595 ahead of upcoming labour data that could influence interest rate expectations. According to Kristina Clifton, senior economist at Commonwealth Bank of Australia, a lower unemployment rate could lead markets to reconsider pricing for an interest rate cut from Australia's central bank this year, potentially providing support for the Aussie dollar.
Please note that prices and figures were correct at the time of composing this update but may have changed by the time of publication.
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