Sep 19 2024: The U.S. dollar edged higher on Thursday, recovering from a more than one-year low after the Federal Reserve delivered a substantial interest rate cut. Meanwhile, sterling strengthened ahead of the Bank of England’s policy-setting meeting.
As of 04:25 ET (08:25 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.1% to 100.410. This followed a dip to its lowest level in over 12 months in the previous session. Traders are now awaiting the release of U.S. weekly jobless claims data for further insights into the health of the labor market.
Sterling Gains Ahead of BoE Meeting
In Europe, the British pound (GBP/USD) climbed 0.3% to 1.3253, after hitting 1.3298 in the previous session, marking its strongest level since March 2022.
The Bank of England is expected to hold its key interest rate at 5% following a 25-basis point cut in August.
“The inflation outlook hasn’t improved enough to justify additional easing just yet,” ING analysts commented.
UK inflation stood at 2.2% year-over-year last month, near the BoE’s medium-term target. However, services inflation remains elevated at 5.6% annually.
Euro Gains Amid ECB Uncertainty
The euro (EUR/USD) rose 0.3% to 1.1149, nearing a three-week high. While the European Central Bank (ECB) cut rates for the second time this year last week, uncertainty lingers over when the next move will be.
Eurozone inflation, while falling to 2.2% in August, is still not as low as desired. Bundesbank President Joachim Nagel indicated that interest rates need to stay high to combat price pressures. Inflation could rise again towards the end of 2024, potentially reaching 2.5%.
Yen Softens Ahead of BOJ Meeting
The yen weakened, with USD/JPY rising 0.3% to 142.75 as traders prepared for the Bank of Japan (BOJ) meeting on Friday. The BOJ is widely expected to keep rates unchanged but may signal potential rate hikes due to an elevated inflation outlook. Japanese consumer inflation data is also due on Friday.
Chinese Yuan Stable Ahead of PBOC Decision
The Chinese yuan (USD/CNY) traded 0.2% lower at 7.0698, as markets await a loan prime rate decision from the People’s Bank of China on Friday. The central bank is expected to maintain the current rate.
Fed’s Large Rate Cut Confirmed
On Wednesday, the Federal Reserve initiated its latest rate-cutting cycle, reducing interest rates by 50 basis points to a range of 4.75% to 5%—the first such cut since March 2020.
Fed Chair Jerome Powell noted that risks between higher inflation and labor market weakness are now balanced. While the Fed is likely to cut rates further, Powell stressed that the bank does not intend to return to the ultra-low rates seen during the pandemic.
ING analysts suggest that, despite Powell’s efforts to soften the dovish tone of the rate cut, the Fed may still be seen as accommodating market expectations, leaving the dollar in a relatively weaker position compared to other developed market currencies.
