Forex
British inflation sends pound briefly below $1.30, dollar firm on Fed outlook, potential Trump win
By Alun John and Kevin Buckland
LONDON/TOKYO (Reuters) -Sterling tumbled to its lowest in two months on Wednesday after softer than expected British inflation data offered scope for the Bank of England to cut rates more forcefully, while the euro was at a 10-week low ahead of a European Central Bank meeting.
The pound dropped to as low as $1.2984, dipping under the $1.30 level for the first time since Aug. 20, after data showing the rate of annual consumer price inflation dropped to 1.7% in September from 2.2% in August.
That was the lowest reading since April 2021, was under the 1.9% forecast by a Reuters poll of economists. It reinforced bets on a BoE interest rate cut next month and made a further cut in December more likely.
Sterling recovered a little ground in morning trading in Europe and was last 0.42% lower on the day at $1.3018.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year,” said Francesco Pesole FX strategist at ING.
“We think that has incidentally opened the door for a period of underperformance by sterling,” he said, adding they see the pound trading well below $1.30 and the euro above 84 pence.
The common currency was last 0.44% higher on the pound at 83.67 pence.
SOLID DOLLAR
Moves elsewhere were less dramatic but the euro was at $1.0891, steady on the day but pinned at its lowest since Aug 2, having been hurt by traders pricing out rate cuts from the Federal Reserve and including a potential election win by former President Donald Trump – seen as a dollar positive – in their thinking.
Investors will be closely watching the European Central Bank’s meeting Thursday, though if policy makers deliver the currently priced 25 basis point rate cut and President Christine Lagarde refrains from giving too many clues about the further rate outlook, the market impact could be muted.
Across the Atlantic, traders have laid 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. A month ago, traders saw greater than 29% odds of a super-sized 50-basis-point reduction.
Market pricing still strongly favours a total of 50 basis points of easing this year, but comments from central bankers overnight leaned hawkish. The Atlanta Fed’s Raphael Bostic said he pencilled in just one 25 basis-point rate reduction for this year, while the San Francisco Fed’s Mary Daly said “one or two” cuts in 2024 would be “reasonable”.
The dollar added 0.1% to 149.37 yen, not far from Monday’s high of 149.98 yen, the strongest since Aug. 1.
BOJ board member Seiji Adachi said on Wednesday the central bank must raise rates at a “very moderate” pace and avoid hiking prematurely, given uncertainties over the global economic outlook and domestic wage developments.
The Australian and New Zealand dollars sagged as scepticism widened over stimulus from top trading partner China.
The dropped as much as 0.51% to $0.6669, the lowest since Sept. 12, before recovering to $0.6684, while the sank as much as 0.69% to $0.6041, a level last seen on Aug. 19.
“There’s definitely been some building scepticism about China’s real commitment to the kind of fiscal support that would be seen as really cathartic,” and that is pulling down the Australian and New Zealand currencies this week, said Ray Attrill, head of FX strategy at National Australia Bank (OTC:).
New Zealand’s currency was also weighed down further by data showing cooling inflation, keeping the door open for aggressive easing by the central bank.
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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