Forex
Dollar steadies, but on track for sharp weekly loss
Investing.com – The U.S. dollar edged higher in European trade Friday, but was on track for a hefty weekly fall after cooling inflation and weak retail sales brought Federal Reserve rate cuts back into focus.
At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.580, marginally above a five-week low just below 104 seen earlier this week.
Dollar steadies after hawkish Fed speak
The dollar has recovered to a degree as several Fed officials, specifically members of the bank’s rate-setting committee, said that they needed much more confidence that inflation was coming down, beyond some easing inflation in April.
“I now believe that it will take longer to reach our 2% goal than I previously thought,” St. Louis Federal Reserve president Loretta Mester said on Thursday, adding that further monitoring of incoming data will be needed.
Federal Reserve Bank of New York President John Williams agreed with this view.
“I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal in the very near term,” Williams said.
However, the dollar is still on course for a weekly loss of around 0.7% after the milder than expected U.S. data raised expectations the will deliver two interest rate cuts this year, probably starting in September.
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U.S. were also flat in April and softer-than-expected, and manufacturing output unexpectedly fell.
“Our view for the near term remains that we could see a further stabilisation in USD crosses as markets await the next key data input: April core PCE on 31 May,” said analysts at ING, in a note.
Euro slips ahead of CPI release
In Europe, traded 0.1% lower to 1.0860, having traded as high as 1.0895 in the wake of U.S. inflation release, but the single currency is still up around 0.9% on the dollar this week.
The final reading of the is due later in the session, and is expected to show inflation rose by 2.4% on an annual basis in April.
The is widely expected to cut interest rates in June, but traders remain unsure of how many more cuts, if any, the central bank will agree to over the course of the rest of the year.
Traders have priced in 70 basis points of ECB cuts this year – a lot more than the just under 50 bps of easing priced in for the Fed.
fell 0.1% to 1.2658, but is still on track for gains of around 1% this week.
The Bank of England is also expected to cut rates from a 16-year high this summer, but volatility is likely to be limited ahead of the release of key U.K. inflation figures next week.
Yen slips after weak Japanese GDP data
In Asia, rose 0.3% to 155.87, close to breaking above 156, after weaker-than-expected Japanese data for the first quarter.
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traded 0.1% higher at 7.2209, moving back to six-month highs above 7.22 after data earlier Friday showed grew more than expected in April, but growth in slowed sharply, while a decline in Chinese house prices accelerated last month.
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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