The dollar softened on Thursday, with the euro holding near an eight-month high following data that showed U.S. inflation slowing. This data supported expectations that the Federal Reserve might cut borrowing costs next month.
The yen remained steady at 147.315 per dollar after data revealed Japan’s economy expanded by an annualized 3.1% in the second quarter, thanks to a robust increase in consumption. This growth keeps the possibility of another near-term rate hike on the table.
Although the yen has retreated from the seven-month high of 141.675 per dollar reached during last week’s market turmoil, it is still well above the 38-year lows of 161.96 seen at the beginning of July.
Interventions by Tokyo early last month and a surprise rate hike from the Bank of Japan at the end of July caught investors off guard, leading to a retreat from popular carry trades and boosting the yen.
In the U.S., data on Wednesday showed a moderate rise in the consumer price index, meeting expectations, with the annual inflation rate slowing to below 3% for the first time since early 2021.
These figures, combined with a mild increase in producer prices in July, suggest that inflation is on a downward trend. However, traders now expect the Fed to be less aggressive with rate cuts than initially hoped.
Josh Chastant, portfolio manager for public markets at GuideStone Funds, noted that both the U.S. CPI and PPI data suggest a 25 basis point (bps) cut by the Fed in September.
“A lot will depend on the tone of the minutes and post-meeting press conference, but markets might be mildly disappointed if we only get a 25 bps reduction,” he said.
Markets are currently pricing in a 64% chance of a 25 bps cut next month and a 36% chance of a 50 bps reduction, according to the CME FedWatch tool. Traders were evenly split between the two options at the start of the week following last week’s sell-off.
Markets anticipate 100 bps of cuts from the Fed this year.
Mansoor Mohi-Uddin, chief economist at Bank of Singapore, expects the Fed to start reducing rates in “measured 25 bps moves to the benefit of risk assets.”
“We anticipate cuts in September and December, with a possible additional cut in November if the U.S. labor market weakens further this year.”
Attention will now shift to U.S. retail sales data due later on Thursday.
The euro was steady at $1.1011 in early trading, close to $1.10475, its highest level since early January, which it reached on Wednesday. The single currency is up 0.86% for the week, on track for its strongest weekly performance in over a month.
Sterling was slightly stronger at $1.28375 after a dip on Wednesday, as a softer-than-expected reading on British consumer price inflation supported expectations of further rate cuts by the Bank of England this year.
The dollar index, which measures the U.S. unit against six major rivals, was last at 102.59, near the eight-month low of 102.15 it reached last week. The index is on track for its fourth consecutive week in the red, a streak last seen in March-April 2023.
The New Zealand dollar was 0.13% higher at $0.60035, recovering from a drop of more than 1% in the previous session after the Reserve Bank of New Zealand cut the cash rate by a quarter point, its first easing since early 2020.
The Australian dollar rose 0.42% to $0.6624 after data showed Australian employment surpassed forecasts in July, despite the jobless rate ticking up to a 2.5-year high. The strength of labor demand could support the Reserve Bank of Australia’s argument against a rate cut this year, given persistent inflation.
Elsewhere, China’s yuan weakened against the dollar, pressured by disappointing data that showed a slowdown in China’s factory output growth in July.
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