Forex
Dollar edges down ahead of data, set for first monthly drop in 2024
By Stefano Rebaudo
(Reuters) -The dollar edged down on Tuesday ahead of key U.S. and euro zone inflation data later this week that could affect expectations for major central banks’ monetary policy outlooks.
The greenback was also on the verge of its first monthly decline in 2024.
“A backdrop where the Federal Reserve can start cutting rates this year, even in December, is consistent with further dollar weakness,” said Athanasios Vamvakidis, global head of forex strategy at BofA. He mentioned some weakness in U.S. economic data and recent stronger-than-expected figures from the euro zone as the main reasons for the dollar slowdown.
He also highlighted that the Fed had pushed back against speculation about possible rate hikes, preventing the dollar from appreciating further.
Markets are currently more than fully priced for a U.S. rate cut in December. They also discount an 80% chance of such a move in November and a 60% chance in September.
Against a basket of currencies, the dollar was down 0.20% to 104.44, for a 1.84% decline on a monthly basis.
The euro was up 0.25% to $1.0885 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.
ECB’s Francois Villeroy de Galhau confirmed market expectations that, barring major surprises, a first rate cut next week is a done deal. But investors have recently updated their bets on future ECB moves, pricing in less than a cut in every quarter in 2024 and early 2025.
German inflation data due on Wednesday and the wider euro zone’s reading on Friday will be watched for clues on how soon easing from the central bank could come.
All of that data, however, will be a sideshow to the main focus for markets on Friday when the U.S. core personal consumption expenditures (PCE) price index report – the Federal Reserve’s preferred measure of inflation – is released. Expectations are for it to hold steady on a monthly basis.
Analysts tried to assess the impact of an upside surprise in U.S. figures as they see the market well priced for benign data.
Derek Halpenny, head of research, global markets EMEA at MUFG Bank said markets might be more sensitive to stronger-than-expected incoming data against the backdrop of the increased debate on the Fed’s implied neutral policy stance.
Fed Governor Christopher Waller said last week that a key underlying rate crucial for the monetary policy, the so-called R-Star, may rise after years of declines. R-star is the rate that neither stimulates nor restricts the economy while keeping inflation at the central bank’s target.
“This increased debate on the (Fed’s) implied neutral policy stance could have an increasing impact on lifting market yields if the economy fails to slow,” said Halpenny.
The yen languished near 157 per dollar and last stood at 156.80 per dollar.
BofA’s Vamvakidis said a Fed first rate cut in 2024 would “be consistent also with a strengthening of the yen versus the greenback.”
However, if markets should discount a Fed that “starts easing its policy in 2025, the yen could test the 160 level again, and more interventions by Japanese authorities will be likely,” he added.
The Bank of Japan’s (BOJ) three key measurements of underlying inflation all fell below 2% in April for the first time since August 2022, data showed on Tuesday, heightening uncertainty over the timing of its next interest rate hike.
That comes ahead of Friday’s Tokyo inflation data, a leading indicator of nationwide figures.
BOJ Governor Kazuo Ueda said on Monday the central bank would proceed cautiously with inflation-targeting frameworks.
Sterling and the New Zealand dollar both rose to over two-month highs. They last bought $1.2786 and $0.6162, respectively.
The dollar edged 0.25% higher. Australian monthly consumer price index data is due on Wednesday.
In cryptocurrencies, bitcoin slid 1.5% to $68,571, while ether rose 0.3% to $3,903.05.
Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.
A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.
“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.
Where does this leave us now with our USD views?
Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.
Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .
The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.
Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.
Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.
With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.
At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.
Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.
Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.
“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.
That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”
There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.
“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”
At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.
Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.
At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.
Dollar helped by trimmed rate cut expectations
Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.
Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.
Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.
Sterling slumps after inflation release
In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.
The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.
This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.
“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”
traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.
The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.
“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.
Yuan nurses weekly losses
fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.
China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.
rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.
data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.
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