Forex
Dollar edges higher ahead of key Federal Reserve meeting
Investing.com – The U.S. dollar edged higher Wednesday, climbing towards its highest level in November ahead of the conclusion of the latest Federal Reserve policy-setting meeting.
At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 106.240, after earlier climbing as high as 106.380, near the 106.51 mark that would be the highest since Nov. 1.
Does the Fed still see rate cuts this year?
The concludes its latest two-day meeting later in the session, and is widely expected to keep interest rates at the elevated 5.25%-5.5% levels.
Progress towards the Fed’s 2.0% medium-term inflation target has somewhat stalled of late, as typified by Tuesday’s release of the Employment Cost Index, which rose at an elevated 4.2% rate on a year-over-year basis in the first quarter, matching the rise in the fourth quarter.
This has resulted in futures markets pricing in just a single quarter-point rate cut by year-end, from as many as five of those at the start of the year, with this hawkish leaning benefiting the dollar.
The main focus will be on what Chair has to say in his news conference, particularly given the bank won’t be updating economic projections this time around.
Investors will be awaiting indications about whether the Fed still expects to cut interest rates at some stage this year.
Euro calm as inflation holds steady
In Europe, edged higher to 1.0669, trading in limited volumes with much of the European continent on holiday.
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Data released on Tuesday showed that held steady at 2.4% in April, solidifying an already strong case for the to cut interest rates next month.
The ECB all but promised a rate cut on June 6, provided there is no nasty surprise in wage or price developments.
“The ECB’s governing council considers that if this inflation outlook is maintained, it would be appropriate to start reducing the current level of monetary policy tightening in June,” De Cos, who is also head of the Spanish central bank, said in the Bank of Spain’s annual report on Tuesday.
traded largely flat at 1.2491, in subdued trading.
As it currently stands, money markets currently fully price a first quarter-point Bank of England rate cut by its Aug. 1 meeting – with a roughly 50-50 chance of a move as soon as June 20.
Yen retreats; more intervention needed?
In Asia, rose 0.1% to 157.91, with the yen retreating even after suspected government intervention sparked a sharp rebound in the currency.
The pair is still way off the 34-year high of 160.245 seen at the start of the week, but the Japanese authorities will be concerned that the yen appears to be retreating once more, potentially forcing them to enter the market once more.
Other Asian currencies were muted, amid a mix of labor day holidays and caution before the Fed.
rose 0.2% to 0.6482, with the Aussie dollar pair strengthening ahead of next week’s meeting of the .
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The RBA could potentially offer up a hawkish stance following a stronger-than-expected inflation reading for the first quarter.
Investing.com – Markets appear to have bought into the “soft landing” narrative after the Federal Reserve’s hefty interest rate cut, but Bank of America Securities remains a seller of the US dollar for now as the US central bank has room to go lower.
Following the Fed’s 50bp cut, front end rates (the main driver of foreign exchange moves) reflect expected Fed easing magnitudes on par with significant past downturns, BoA Securities said, in a note, dated Sept. 26.
Meanwhile, risk-asset performance has been more consistent with a “soft landing” and reflation: Higher-beta FX outperforming lower-beta, equities and gold higher, credit tighter, and longer-end UST curve bear steepening.
A soft landing is still the bank’s base case, and it continues to foresee broad USD depreciation. But hard landing risks appear to be underpriced, and “we must be mindful of risks in these uncertain times.”
Large rate shocks (in either direction) tend to be dollar positive, but the nature of the move matters.
“With the ‘soft landing’ narrative well priced, any negative headline shocks may indeed lead to brief risk-off USD retracements. Still, we believe the USD is in a “sell-the-rally” regime for now.”
Investing.com – The Federal Reserve has started its rate-cutting cycle, and Bank of America Securities continues to expect modest US dollar downside going into 2025.
“Although the Fed modestly surprised markets with a 50 bps cut last week, we see core FX dynamics largely unchanged in G10, with continuing to drift higher,” analysts at Bank of America Securities said, in a note dated Sept. 26.
The bank sees the US dollar as moderately overvalued, but the Fed rate cutting cycle would likely help further attenuate this overvaluation over the medium term, including our outlook for a rising EUR/USD.
“We look for EUR/USD to build on recent gains, with our unrevised forecast profile of end-2024 at 1.12 and end-2025 at 1.17,” BoA said.
USD downside is more likely to continue, the bank said, as disinflationary trends and a softening labor market support the Fed in a modestly more accelerated rate-cutting pace.
BoA expects another 50 bps cut at their November meeting and a 25 bps reduction in December.
At 10:00 ET (14:00 GMT), EUR/USD traded 0.1% higher at 1.1142, up around 1% year-to-date.
Investing.com — Citi has updated its forecast for the , providing insights into the pair’s trajectory for both the medium-term and long-term.
The bank’s strategists highlight that the recent depreciation of the yen is driven largely by a retrospective narrative tied to Japan’s digital account deficit. However, they suggest that this narrative of structural yen weakness is a “fallacy,” with the currency’s current status being more nuanced.
In its medium-term base case forecast, Citi suggests the yen could weaken, potentially driving the USD/JPY towards 150 by the end of 2024.
However, looking further ahead, strategists caution the pair could dip below 140 in early 2025, continuing its downward path to close near 130 by the end of next year.
In explaining this forecast, Citi points out that various factors could reverse the recent yen weakness.
Among these is the potential repatriation of foreign earnings by Japanese corporations, which could provide upward pressure on the yen. Moreover, the travel surplus and increasing royalties on intellectual property are improving Japan’s current account balance, which might further support the currency’s strength over time.
Citi also challenges the prevalent view that Japan’s digital account deficit reflects a long-term structural weakness.
“In our view, this is essentially a trend-following argument that seeks a retrospective narrative of the JPY depreciation that has continued for the past ten years,” Citi strategists noted.
“It is based on a distorted story of the actual picture of Japan’s BoP, and the rectification of this distortion could take several years. During this period short JPY positions held by a range of economic entities will remain, and there should be steady market forces that work to overturn these positions.”
Still, Citi remains cautious about the yen’s near-term outlook. The bank acknowledges that significant factors, such as portfolio investments and the broader financial balance, will continue to influence USD/JPY fluctuations.
They also warn that the pair remains sensitive to marginal changes in market conditions and flows.
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