Forex

First to hike, last to cut? BoE caution cossets pound: Mike Dolan

Published

2 months ago

July 21, 2024

By Mike Dolan

LONDON (Reuters) -First to hike, first to hit its inflation target – and the last to cut?

It may be unwise to read too much into volatile and marginal interest rate bets in financial markets, but right now that’s how they sketch the Bank of England’s (BoE) policy trajectory against its major economy peers.

The pound – enthused by an expected but decisive UK election result this month – is lapping up that rate sequence most of all. And that’s perhaps one reason the BoE may be tempted to jump the market gun next month, even though there’s still only a 50% chance of that baked into the money curve.

Sterling topped $1.30 for the first time in a year this week, hit a two-year high against the euro and notched a 16-year high against Japan’s ailing yen. The BoE’s own trade-weighted sterling index is at its highest since 2016’s Brexit referendum – appreciating some 13% from the nadir of 2022’s jarring government budget farce.

Might the sheer strength of the pound be enough to force its hand?

Debate on the extent of so-called “exchange rate pass-through” to inflation has raged for years – with many different opinions on what underlying conditions make it impactful.

The clear counter-point is that BoE’s main problem right now is less about import prices or dollar-denominated energy than that it is about still-spiky domestic price inflation.

But in a split decision, the pound may nudge things along – not least if there’s concern that UK financial conditions more broadly don’t over-tighten at the wrong moment.

UK economic surprises are unusually positive right now, but global equivalents have turned sour at midyear and the exchange rate could well come into play if that presages a wider international slowdown.

FIRST IN, LAST OUT

Japan’s peculiar cycle aside, the BoE was the first of the rest of G7 to start lifting borrowing costs into the post-pandemic inflation spike in late 2021 – hiking twice before the U.S. Federal Reserve started three months later and piling 5 percentage points onto a near zero policy rate in 20 months.

Although it remains irked by annual wage gains and services price growth in excess of 5%, the BoE has this year become the first of its peer group to hit its headline 2% inflation target – where it’s been held for two months now.

And yet the jittery world of money markets still expect it to be the last of the six to execute its first cut – following not only the European Central Bank (ECB) and Canada in the G7, but the Swiss and Swedish central banks to boot.

Markets even reckon the ECB, Canada and Sweden will likely have cut a second time before Threadneedle Street will be ready to budge.

To be sure, the BoE may only lag the Fed by a day in September if it matches those rate bets. But, even then, there’s still a marginal doubt in money markets that it pulls the trigger in two month’s time, while futures are comfortable fully pricing a Fed move.

Why the caution, and does the UK really need to bookend both sides of the global cycle?

KNIFE EDGE

For decades, Britain was seen as an inflation outlier – due in part to instability in sterling and its effect on such an open economy, its poor productivity record and political control of interest rates until 1997.

BoE independence shifted the dial. But the UK’s outsize exposure to the banking crash of 2008 and then the trade and investment disruption from Brexit pummeled the pound – even if that was likely masked in domestic prices by subdued global inflation more generally.

That all changed with the post-COVID global inflation surge – and UK annual price rises topped 11% at one point, higher than the peaks in other countries.

The government budget missteps of 2022 added fiscal risk perceptions and fears for joined-up thinking between Treasury and the central bank on inflation control – compounding as it did UK vulnerability to the Ukraine-related energy shock.

Some of that has been painfully repaired since, with this month’s change of government seen by many overseas investors as a clean break.

Whether the BoE can breathe easier is now the question. For a start, public inflation expectations fell to their lowest this month since before the pandemic, possibly assuaging some BoE concerns about “persistence” in wage and services inflation.

Sterling’s rally apart, the dissipation of that latest risk factor can be seen most clearly in UK government bond markets, where the 150 basis point yield premium on five-year gilts over German equivalents is a full percentage point lower than it was at the height of the 2022 budget blowout.

Yet on the flipside, if BoE concern shifts to the dangers of staying too tight for too long, then the sight of an inflation-adjusted “real” five-year gap with Germany at its highest in 20 years may be food for thought.

With the pound now comfortably feeding off that premium rather than balking at it, the BoE might view it as a window.

A month or two may not matter greatly in the wider scheme of things, of course.

But despite hesitant money market pricing, there are plenty of economists who still expect the BoE to beat the Fed to the punch – with the likes of Barclays and Deutsche Bank tipping a rate cut next month as the central bank uses new forecasts in its latest Monetary Policy Report to explain.

“August’s Bank Rate call is on a knife-edge,” said AXA Investment Managers’ G7 economist Gabriella Dickens, adding she expects a 5-4 policymaker vote to cut.

The opinions expressed here are those of the author, a columnist for Reuters.

(By Mike Dolan X: @reutersMikeD; Editing by Jamie Freed)

Forex

Dollar bounces after Fed-inspired losses; sterling gains ahead of BoE

Published

6 hours ago

September 19, 2024

Investing.com – The U.S. dollar edged higher Thursday, bouncing off its over one-year low after the Federal Reserve announced an outsized interest rate cut, while sterling gained ahead of the Bank of England’s latest policy-setting meeting.

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 100.410, having fallen to a more than 12-month low in the previous session.

Large Fed cut confirmed

The started its latest rate-cutting cycle on Wednesday, trimming interest rates for the first time since March 2020 by a hefty 50 basis points to a range of 4.75% to 5%.

Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.

But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.

“Where does the Fed’s decision leave the dollar,” analysts at ING ask, in a note. “In our view, still in a softer position compared to most developed market peers. Powell tried to mitigate the dovishness of the outsized rate cut, but that it would be hard to fight the perception that it was the dovish market pricing that pushed the Fed over the line for the 50bp move. If the Fed is perceived as unwilling to disappoint market expectations, investors may continue to prefer erring on the dovish side.”

Attention turns to the release of the weekly data, for the latest clues over the health of the important labor market.

Sterling in demand ahead of BoE meeting

In Europe, rose 0.3% to 1.3253, after climbing to 1.3298 in the previous session, its strongest level since March 2022.

The meets later in the session, and is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.

“The inflation picture simply hasn’t improved enough to warrant more easing just yet,” said ING.

UK came in at 2.2% on an annual basis last month, close to the bank’s medium-term target, but services inflation is running hot at an annual 5.6%.

traded 0.3% higher to 1.1149, not far from the three-week high hit in the previous session.

The cut rates for the second time this year last week, but a degree of uncertainty exists over when the next move will be.

Eurozone inflation is still not as low as the ECB would like, Bundesbank President Joachim Nagel said on Wednesday, so interest rates need to remain sufficiently high to resolve price pressures.

While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5%.

Yen retreats ahead of BOJ meeting

rose 0.3% to 142.75 as traders also positioned for no changes to local interest rates after a meeting on Friday.

The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation.

Japanese is also due on Friday.

traded 0.2% lower to 7.0698, ahead of a decision by the People’s Bank of China on Friday. The central bank is expected to leave this key rate unchanged.

Forex

Bullish bets steady on Asian currencies as Fed easing bets soften dollar, Reuters poll shows

Published

6 hours ago

September 19, 2024

By Sameer Manekar

(Reuters) – Analysts remained bullish on most Asian currencies despite marginally dialling back some bets, a Reuters poll showed on Thursday, as a defensive U.S. dollar driven by a dovish Federal Reserve enhanced the appeal of risk-sensitive assets.

Long bets were the highest on the Malaysian ringgit and the Thai baht, with those on the latter at their peak since January 2023, driven by strong growth fundamentals and stabilising politics.

Responses to the fortnightly poll of 10 economists and analysts were received before the U.S. Federal Reserve’s half-point rate cut and Bank Indonesia’s surprise quarter-point rate cut on Wednesday.

Anticipation of Fed rate cuts pushed the dollar to the defensive, providing a much-needed breathing space for emerging markets and improving their allure. Most Asian currencies logged a stellar recovery in August against the dollar.

“We do not rule out further bouts of USD weakness in the weeks ahead and expect overall downward pressure on USD/Asia FX to be sustained,” analysts at Barclays said.

The is trending near 100 against a basket of major currencies, down from 104 at the end of July.

The analysts said they expect Asian currencies to continue to appreciating in the fourth quarter, but foresee a reversal in the first half of 2025.

Ryota Abe, an economist at Sumitomo Mitsui (NYSE:) Banking Corp, said the market view of Fed rate cuts by the year-end “looks excessive” which could lead to correction in Asian emerging market currencies.

Bullish bets on the Chinese yuan and Singapore dollar were dialled back to levels seen four weeks ago, while those on the Philippine peso hit a four-year peak.

Analysts were long on the Indonesian rupiah for the fourth consecutive iteration of the poll – the longest since May 2023 – underlining the recent appreciation stemming from robust economic fundamentals and growing inflows into emerging markets.

The rupiah has appreciated more than 6% since July and is expected to continue marching on after Bank Indonesia’s (BI) surprise rate cut decision to support growth, front-running the Fed.

Barclays analysts said BI will “likely broadly match or slightly under-deliver versus the Fed in terms of the magnitude of total cuts” which should not “necessarily see the IDR fall out of markets’ favour from a rates-differentials perspective”.

The Indian rupee continued to remain out of analysts’ favour, although short positions were halved since early August as the currency staged a recovery following a sell-off driven by the unwinding of yen carry trades.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).

The survey findings are provided below (positions in U.S. dollar versus each currency):

DATE

19-Sep-24 -0.67 -0.9 -1.12 -1.18 -0.66 0.33 -1.3 -1.1 -1.33

05-Sep-24 -0.85 -1.09 -1.26 -1.05 -0.77 0.21 -1.46 -1.00 -1.22

22-Aug-24 -0.62 -0.93 -1.08 -1.26 -0.70 0.21 -1.57 -1.03 -1.16

08-Aug-24 -0.02 0.05 -0.61 -0.02 0.59 0.60 -0.78 -0.29 -0.57

25-Jul-24 1.07 0.79 -0.33 0.35 0.86 0.12 0.39 0.43 0.02

11-Jul-24 1.05 0.87 0.06 0.73 0.68 0.22 1.03 0.86 0.51

27-Jun-24 1.34 1.28 0.80 1.49 0.88 0.46 1.00 1.37 0.91

13-Jun-24 0.95 0.87 0.62 1.22 0.64 0.37 1.00 1.23 0.92

30-May-24 1.05 0.72 0.33 0.94 0.53 0 0.81 1.19 1.00

16-May-24 1.05 0.96 0.35 0.96 1.02 0.39 1.23 1.29 1.00

Forex

Asia FX muted as dollar rises past bumper rate cut; yen down before BOJ

Published

6 hours ago

September 19, 2024

Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday as the dollar firmed sharply after an outsized interest rate cut by the Federal Reserve was offset by less dovish signals on future rates.

The Japanese yen was among the worst performers for the day, retreating amid pressure from the dollar and as traders priced in no changes to interest rates by the Bank of Japan later this week.

Broader Asian currencies were muted tracking mixed signals from the Fed.

Dollar rises past 50 bps rate cut, Fed outlook less dovish

The and both rose about 0.4% in Asian trade, extending overnight gains.

Strength in the greenback came even as the Fed – the higher end of market expectations- to a range of 4.75% to 5%.

While traders were still pricing in at least 125 bps worth of cuts by end-2024, Powell’s comments spurred expectations that rates will be higher than initially expected in the medium and long term.

This notion pressured most Asian currencies.

Japanese yen weakens with BOJ on tap

The Japanese yen’s pair rose 0.6% to 143.12 yen and was among the worst performers in Asia.

The currency was pressured by strength in the dollar, while traders also positioned for no changes to local interest rates after a on Friday.

The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation. Japanese is also due on Friday.

Broader Asian currencies were mostly mixed. The Australian dollar’s pair rose 0.4%, buoyed by a stronger-than-expected reading on the in August.

Strength in the labor market gives the Reserve Bank of Australia more headroom to keep rates high for longer, which it is more inclined to do amid signs of sticky inflation in the country.

The Chinese yuan’s pair reversed early gains to trade sideways, with focus squarely on a l decision by the People’s Bank on Friday. The central bank is expected to leave the LPR unchanged.

The South Korean won’s pair jumped 1% as local trade resumed after three days of holidays. The country’s shrank slightly in August.

The Indian rupee’s pair was flat, but moved further away from the 84 rupee level. The Singapore dollar’s pair was flat.