Dollar Trades Mixed After Fed Rate Cut

Forex

Summary:

The Federal Reserve surprised the market yesterday by cutting the dollar rate by 0.5%, with expectations that a similar reduction might occur by the end of the year.

The Federal Reserve surprised the market yesterday by cutting the dollar rate by 0.5%, with expectations that a similar reduction might occur by the end of the year. The dollar initially dropped sharply following the announcement but then partially recovered after comments from Jerome Powell. The Fed Chair stated that the current decision would not dictate the pace for further rate cuts and should help maintain stability in the labour market under current conditions.

Major currency pairs reacted strongly to the Fed’s decision. The GBP/USD pair hit a new high for the year, dropping to 1.3100, while USD/JPY fell to 140.50 before strengthening by more than 200 pips. The USD/CAD pair managed to rise above 1.3600.

USD/JPY

The USD/JPY pair is under dual pressure. On one side, the US regulator is aggressively cutting rates, while the Bank of Japan plans to raise rates after a long period of ultra-low rates. In such conditions, the pair experiences high volatility, with a daily range of 200 pips.

According to technical analysis, the pair is undergoing a corrective pullback after forming a “hammer” pattern on the daily timeframe. Currently, the rise is constrained by a significant resistance level at 144.00. The price has been testing this level for about two weeks, and if buyers fail to hold above it in the upcoming trading sessions, a return to 141.00-140.00 is possible.

Factors influencing USD/JPY include:

Today at 09:00 (GMT +3:00), the release of the Philadelphia Fed manufacturing index (US).

Today at 09:00 (GMT +3:00), the release of initial jobless claims in the US.

Tomorrow at 05:30 (GMT +3:00), the Bank of Japan’s monetary policy report.

USD/CAD

Yesterday, the USD/CAD pair managed to break above 1.3600 and tested the key level of 1.3650. If buyers can maintain the 1.3600-1.3580 range as support, the corrective rise may continue towards 1.3800-1.3700. If the minimum of 1.3440 from yesterday is revisited, the downtrend may resume with renewed strength.

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Warren Takunda

Economic

The Federal Reserve has made its first rate cut in four years, taking an aggressive stance with a 0.5% reduction, as anticipated by some analysts.

While there is considerable debate over the Fed's next steps in its remaining two meetings this year, the bold start to its easing cycle holds substantial implications for European markets and the euro.

The immediate market reaction and implications on the future

Wall Street ended lower on Wednesday, likely due to a "sell the fact" reaction, as the markets had recently already priced in the Fed's rate cut.

However, risk-on sentiment may be returning, with equities across the Asia-Pacific region rallying on Thursday, and futures pointing to a higher open in both the US and European stock markets.

The euro and the British pound weakened against the US dollar before rebounding, given that the European Central Bank and Bank of England were less dovish than the Fed.

BoE's decision closely watched

The Bank of England's rate decision, due later today, will be closely watched as the bank is set to maintain the policy rate at 5%, compared with the Fed's new range of 4.75% to 5% after the cut.

The Fed's rate cut marks a turning point for global markets, as a lower interest rate environment indicates more liquidity, which could reduce the pressure on other central banks to maintain higher rates.

The European Central Bank is likely to continue with rate cuts, but the key question is how much and how quickly it will proceed for the rest of the year.

If the ECB's pace of rate cuts is slower than the Fed's, the euro could face further downward pressure against the US dollar.

Meanwhile, the dollar's continued weakness could support commodity prices, which would benefit currencies linked to commodities such as the Australian dollar, the Canadian dollar, and the New Zealand dollar.

In terms of asset classes, cash may become less attractive, as banknotes generate lower yields.

Benefits for different sectors

Consequently, so-called "hot money" could return to markets, flowing into equities, commodities, bonds, and property.

In the stock market, sectors exposed to high debt levels, such as small caps, utilities, and property, are likely to benefit from lower interest rates.

This shift could lead investment funds to rotate from large-cap stocks to smaller companies in search of higher returns.

The trend has already emerged on Wall Street this year and is reflected in Europe. As a result, the Euro Stoxx Small 200 index could begin to outperform the Euro Stoxx 50.

Additionally, commodity-related assets such as growth-sensitive industrial metals and energy, particularly crude oil and copper, are worth watching.

The recent underperformance of mining and energy stocks in Europe could present an opportunity for recovery.

Why did the Fed go big with the first cut?

The first jumbo rate cut signalled that the Federal Reserve had kept rates at elevated levels for too long, falling behind most other central banks.

There appears to be an urgency to reduce interest rates rapidly to prevent further deterioration in the US labour market.

Recent data shows a rising trend in unemployment, which could negatively affect consumer spending and economic growth.

The committee raised its median projection for the unemployment rate to 4.4% by the end of the year, up from the previously forecasted 4%.

In its post-meeting statement, the Fed indicated that risks to employment and inflation are now roughly balanced, and it remains strongly committed to supporting maximum employment.

However, the jumbo rate cut wasn't driven by rising risks of an economic downturn or recession.

A soft landing for the economy is still considered achievable, according to recent economic data.

Fed Chair Jerome Powell stated: "I don't see anything in the economy right now that suggests the likelihood of a downturn is elevated."

The Fed's aggressive "front-loading" approach to start the easing cycle isn't expected to set the pace for future decisions, which will be made on a "meeting-by-meeting" basis.

The Fed's Dot Plot (decision makers estimates for future interest rates) indicates a further 0.5% cut in 2024 and a full percentage cut in 2025.

Source: Euronews

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Central Bank

BoJ decision to keep interest rate steady

At its meeting on Friday, the Bank of Japan (BoJ) is anticipated to keep its monetary policy position unchanged. Most market watchers expect the Bank of Japan to maintain its target range for short-term interest rates at 0% to 1%. This move is in line with the Bank of Japan’s (BoJ) continuing policy of bolstering economic stability through vigilant monitoring of inflation and financial market circumstances. The Bank of Japan is unlikely to make any hasty adjustments to its interest rates, regardless of the pressures and uncertainties plaguing the global economy. The next likely rate hike is in December. This cautious approach reflects the BoJ’s dedication to a measured and deliberate response to economic events. In July, Japanese policymakers raised interest rates by 15 bps and have since signalled that more hikes are looming.

The decision by the Bank of Japan is set against the background of major global central bank activity. These international factors further complicate the policy choices of the BoJ. Inflation and financial market stability would most likely continue to be the BoJ’s top priorities. The effects of earlier policy shifts have been carefully tracked by the central bank, and it will maintain this practice going forward.

Ueda comments

In his Friday remarks, Bank of Japan Governor Kazuo Ueda is anticipated to highlight the central bank’s cautious monetary policy. He would likely emphasize the BoJ’s commitment to maintaining its policy stance while closely monitoring economic signs. Ueda will likely indicate that future rate hikes are dependent on the economy and inflation. Ueda’s statements suggest additional rate hikes if economic conditions match the BoJ’s predictions, strengthening the steady normalization of policy. He may also emphasize watching global economic trends, particularly how other big central banks like the Fed respond. Ueda may also emphasize the need for transparent market communication to reduce volatility, considering recent market reactions to BoJ policy modifications. Ueda’s statements should indicate that the BoJ is watchful and sensitive to economic changes while maintaining policy stability.

Japan’s inflation and wage growth

Japan’s underlying inflation rate is projected to stabilize at around 2% as a result of continuous wage growth and effective price pass-through. Following the 2024 spring wage negotiations, the job situation has shown a modest improvement, as real earnings have continued to rise. Notwithstanding the effects of price increases, private spending has shown resilience, and the financial conditions have been favorable. The prevailing economic conditions provide a foundation for the Bank of Japan’s prudent strategy towards policy modifications, which seeks to strike a balance between the provision of economic assistance and the objective of attaining enduring financial stability.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Central Bank

The Bank of England looks set to keep interest rates on hold on Thursday as it awaits signs that inflation risks are quashed, putting the focus instead on a decision about bond sales that could feed into Finance Minister Rachel Reeves' first budget.

British inflation held steady in August but sped up in the services sector, which is key for the BoE, showing why forecasters expect interest rates to fall more slowly than in the United States and the euro zone.

The Federal Reserve went on Wednesday for an unusually large half-percentage-point reduction, a move that reflected "growing confidence" about the outlook for inflation, according to Chair Jerome Powell.

The BoE's Monetary Policy Committee is likely to strike a far more cautious tone on Thursday.

All 65 economists in a Reuters poll published last week said it was likely to hold rates at 5.0%, after cutting them in August from a 16-year high of 5.25%.

Financial markets pointed to a roughly 1-in-4 chance of a cut after Wednesday's inflation data, compared with 1-in-3 the day before.

News on price pressures has been mixed. Wage growth - another key metric for MPC members - cooled as they had expected last month and the economy stagnated in July.

But the Decision Maker Panel, opens new tab - a business survey favoured by the MPC - showed a downward trend in wage growth expectations has halted. Furthermore, services inflation crept up in August, albeit in large part due to volatile air fares.

Tim Graf, head of macro strategy at State Street Global Markets, said the inflation data "solidifies the belief, largely priced by markets, that the Bank of England will stand pat at (the) policy meeting".

The consensus of economists polled by Reuters pointed to a 7-2 split in favour of holding rates. Last month, the MPC voted 5-4 to cut, but said some of the five saw the decision as finely balanced.

QT CRUNCH TIME

Bond investors are watching for Thursday's annual decision on the pace of the BoE's quantitative tightening programme - the sale of hundreds of billions of pounds of British government bond purchased under past attempts to stimulate the economy.

In September 2023, the MPC voted to run down the BoE's stock of gilts by 100 billion pounds ($130 billion) via active sales and bonds maturing, up from 80 billion in the previous 12 months.

Some lawmakers have criticised the QT programme because it crystallises losses sustained by the BoE, which purchased gilts in past years at much higher prices than their current sale value. Those losses are paid for by already-stretched taxpayers.

But the BoE could announce a QT acceleration on Thursday. Around 87 billion pounds of its gilts are due to mature over the next year, leaving just 13 billion pounds for active sales.

Citi and JPMorgan expect the BoE to expand the programme to 120 billion pounds so it can keep up the volume of active gilt sales.

Francis Diamond, head of UK, euro and global inflation strategy at JPMorgan, said in a research note that market reaction to such a move would be limited.

Governor Andrew Bailey has said QT is needed to restore BoE firepower if it has to stimulate the economy with bond purchases again.

Given its impact on the state's budget, Finance Minister Reeves will be watching Thursday's decision. When pressed by lawmakers, she said QT was an operational matter for the BoE.

But many economists think Reeves will change the government's fiscal rules to exclude the impact of the BoE's QT programme. That could give her several billion pounds of extra fiscal space in her inaugural budget, due on Oct. 30, when she is under pressure to increase public spending.

The New Economics Foundation think tank said maintaining the BoE's bond sales at the current pace would cost taxpayers just under 24 billion pounds per year until 2028/29. It said 13.5 billion pounds could be saved annually by ceasing active sales.

"The Bank of England should reflect on the value for money from such choices and the chancellor should reconcile the fact that her fiscal rules are imposing arbitrary constraints on her spending decisions," said NEF economist Dominic Caddick.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Commodity

Brent crude oil recovers further from early September low

Brent crude oil futures’ prices are still recovering from their 68.53 early September low, a level last seen in November 2021, as oil sentiment is the most bearish in over a decade, perhaps pointing to an imminent reversal of fortunes for the commodity (see here).

The 5 and 21 August lows at 74.97-to-75.24 remain in focus but are likely to stall the bounce, at least temporarily. Having said that, immediate upside pressure will be maintained while Monday’s low at 71.18 underpins, together with the 9 September low at 70.51.

Below the early September 68.53 low lie the mid-May, August and November 2021 lows at 65.74-to-64.52.

Brent Crude Oil Price Still Bounces Off Lows, While Silver, Sugar Prices Rally_1

Spot silver price revisits two-month high

The spot silver price’s over 11% rally from its early September low has so far taken it to the $31.24 per troy ounce mark, which is back in sight following Wednesday’s wobble and brief drop to $29.71. While it underpins, immediate upside pressure should remain in play.

Above $31.24 beckons the July peak at $31.75 which remains in sight. En route lies the 10 June high at $31.55 and further up the May peak at $32.51.

Brent Crude Oil Price Still Bounces Off Lows, While Silver, Sugar Prices Rally_2

Sugar price surges to five-month high

The price of sugar has risen sharply due to reduced supply and in doing so has overcome its July and August peaks at 20.11 and 20.79, both of which should now act as support levels.

The sugar price is now trading at levels last seen in April with the early April peak at 22.65 representing the next upside target for the front month futures contract. Brent Crude Oil Price Still Bounces Off Lows, While Silver, Sugar Prices Rally_3

Brent Crude Oil Price Still Bounces Off Lows, While Silver, Sugar Prices Rally_3

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Warren Takunda

Economic

The Bank of England will likely keep interest rates unchanged but signal it will cut interest rates at a future date, with money markets showing an expectation for the next cut to come in November.

Risks to the Pound will come in the composition of the votes for another rate cut, the tone of the guidance and Bank of England Governor Andrew Bailey's post-decision interviews. Recall, there is no press conference, but Bailey has in recent times given interviews in the hours that follow the decision.

Alvise Marino, Strategist at UBS, says he sees an increase in dovish risks around the decision as a potential catalyst for a tactical GBP pullback.

"If this were to be realised, we would look to fade EURGBP strength to 0.85, the top of our projected range for the remainder of 2024, targeting 0.83," says Marino.

This implies a potential recovery in EUR/GBP to 0.85 in the wake of the decision (Pound-Euro rate reference: 1.1765). The UBS year-end target is 0.83 (1.2050), which suggests near-term weakness won't derail the broader Pound Sterling rally.

Strategists at Danske Bank see a similar pattern playing out and say to expect the market reaction to be rather muted upon announcement.

"On balance, we tilt towards a dovish twist which does suggest some slight EUR/GBP topside following the release of the statement, as has been the case the past meetings," says Danske Bank.

Pound to Euro Rate Due a Setback on Bank of England Decision_1

Above: "EUR/GBP tends to move higher on BoE" - Danske Bank.

That said, currency strategists at the Scandinavian lender say they still expect "EUR/GBP to continue its recent move lower driven by UK economic outperformance, BoE lagging peers in an easing cycle for the time being and tight credit spreads."

With the Fed having cut by 50bp last night, the UK now offers the second-most attractive interest rates in the G10, and this should continue to hoover up global investor capital.

Analyst are expecting a 7-2 vote split in favour of rates to remain unchanged at 5.0%, with Ramsden and Dhingra voting for a cut.

The Pound will soften if more members opt to vote for a cut, as this would suggest members of the Monetary Policy Committee are leaning towards an accelerated pace of cuts in the future.

Currently, markets see just one more cut in 2024, but there remain risks that this could rise as investors consider whether the Bank could ape the Federal Reserve and deliver 50bp cuts.

However, given the robust economy and stubborn inflationary pressures, this is unlikely for now. So, while near-term downside risks lurk for Sterling, it could be some time before the broader constructive setup deteriorates.

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Stocks

London stocks were set to gain at the open on Thursday after the US Federal Reserve cut rates by 50 basis points and as investors eyed the latest policy announcement from the Bank of England.

The FTSE 100 was called to open around 80 points higher.

Kathleen Brooks, research director at XTB, said: "The US may have experienced whipsaw price action on the back of yesterday’s Fed rate cut, but there has been a straightforward welcome to the Fed’s dovish leap into its rate cutting cycle in Asia and Europe. The Nikkei is higher by 2.5% and the Hang Seng is higher by more than 1.8%. European futures markets are also pointing to a higher open later this morning, the FTSE 100 is expected to open up 0.7%.

"US futures are also higher on Thursday morning. The gold price initially rallied to a fresh record high on the back of the 50bp rate cut from the Fed, before faltering at this level, however the price of gold is rising once more as we move towards the European open."

The Bank of England decision is due at midday, with no change to rates expected.

Brooks said traders will be parsing the Bank’s statement and minutes to see what it could do next.

"There are two things worth watching: 1, if the BoE sounds concerned about the UK’ s growth outlook, this could take the shine off sterling. 2, The BoE could increase the size of its quantitative tightening programme to reduce the size of its bloated balance sheet. If this happens then it looks like the BoE will be giving with one hand (expected future rate cuts) and taking away with another (reducing the money supply)."

In corporate news, clothing retailer Next once again upgraded annual earnings guidance as full price sales in the first six weeks of the second half of the year "materially exceeded" expectations, rising 6.9%.

It lifted 2024/25 pre-tax profits forecasts £15m to £995m, up 8.4% on last year, after interim profits for the six months to July surged 7.1% to £452m.

Online grocer and logistics group Ocado upgraded its revenue guidance following a strong third-quarter performance which saw retail revenues jump 15.5%.

The company is now targeting low double-digit percentage growth in sales over the year to 3 December, from the £2.8bn generated last year. That’s up from earlier guidance for mid-high single-digit growth given in July.

Source: ShareCast

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Dollar Trades Mixed After Fed Rate Cut

USD/JPY

USD/CAD

What the Fed's Jumbo Rate Cut Means for European and Global Markets

The immediate market reaction and implications on the future

BoE's decision closely watched

Benefits for different sectors

Why did the Fed go big with the first cut?

Source: Euronews

Is BoJ On Hold Until December’s Meeting?

BoJ decision to keep interest rate steady

Ueda comments

Japan’s inflation and wage growth

Bank of England Set to Hold Rates With Bond Sales in Spotlight

QT CRUNCH TIME

Source: Reuters

Brent Crude Oil Price Still Bounces Off Lows, While Silver, Sugar Prices Rally

Brent crude oil recovers further from early September low

Spot silver price revisits two-month high

Sugar price surges to five-month high

Pound to Euro Rate Due a Setback on Bank of England Decision

Above: "EUR/GBP tends to move higher on BoE" - Danske Bank.

Source: Poundsterlinglive

London Pre-Open: Stocks Seen Up as Fed Cuts Rate by 50 Basis Points; BoE Eyed

Source: ShareCast

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