Aug 15 2024: The dollar weakened on Thursday, with the euro holding near an eight-month high following data indicating a slowdown in U.S. inflation, which bolstered expectations that the Federal Reserve may cut interest rates next month.
The yen remained steady at 147.315 per dollar after Japan’s economy reported an annualized growth of 3.1% for the second quarter, driven by strong consumption. This growth keeps the possibility of a near-term rate hike in play.
Although the yen has retreated from the seven-month high of 141.675 per dollar reached during last week’s market turbulence, it remains well above the 38-year lows of 161.96 seen at the start of July. Interventions by Tokyo and a surprise rate hike from the Bank of Japan in late July had previously boosted the yen.
In the U.S., the consumer price index (CPI) rose moderately, with the annual inflation rate falling below 3% for the first time since early 2021. This, combined with a slight increase in producer prices, suggests a downward trend in inflation. Despite this, traders are now expecting the Fed to be less aggressive with rate cuts than previously anticipated.
Josh Chastant, portfolio manager at GuideStone Funds, noted that both CPI and producer price index (PPI) data point towards a potential 25 basis point cut by the Fed in September. However, he cautioned that the market might be disappointed if only a 25 basis point reduction is implemented.
Current market pricing indicates 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. Traders were initially split between these two options following last week’s market sell-off. Expectations are for a total of 100 basis points of cuts from the Fed this year.
Mansoor Mohi-Uddin, chief economist at Bank of Singapore, expects the Fed to implement “measured 25 basis point moves” to support risk assets, with potential cuts in September, November, and December if the U.S. labor market shows further weakness.
Attention is now turning to U.S. retail sales data due later on Thursday.
The euro was steady at $1.1011, close to its recent high of $1.10475, marking its strongest weekly performance in over a month. Sterling gained slightly to $1.28375 after softer-than-expected British inflation data increased expectations for further rate cuts from the Bank of England.
The dollar index, which measures the greenback against six major currencies, stood at 102.59, near its eight-month low of 102.15. It is on track for its fourth consecutive weekly decline, a streak last seen in March-April 2023.
The New Zealand dollar was up 0.13% at $0.60035 after falling more than 1% in the previous session due to the Reserve Bank of New Zealand’s quarter-point rate cut, its first easing since early 2020.
The Australian dollar rose 0.42% to $0.6624 following stronger-than-expected employment data for July, despite a slight increase in the jobless rate. This labor demand might argue against a rate cut by the Reserve Bank of Australia this year, given persistent inflation pressures.
In contrast, China’s yuan weakened against the dollar amid disappointing data showing slower-than-expected growth in China’s factory output for July.
