The USD/CHF pair edges lower to near 0.8535 during the early European session on Tuesday. The ongoing geopolitical tensions in the Middle East provide some support to safe-haven assets like the Swiss Franc (CHF). 

Early Tuesday, Iran warned Israel against any attacks on the Islamic Republic a week after Tehran fired a barrage of missiles on it, raising fears of wider war in the Middle East. Investors will closely monitor the development surrounding geopolitical risks in the region. Any signs of escalating tensions could boost the safe-haven flows, benefiting the CHF.

On the other hand, Friday's upbeat US jobs report prompted traders to further scale back bets for an oversized interest rate cut by the Federal Reserve (Fed) in November. This might lift the Greenback and cap the downside for USD/CHF.

Bob Parker, senior advisor at the International Capital Markets Association, noted the case for aggressive Fed rate cuts is unlikely. “Yes there is a case for modest rate cuts, there is a case for 25 to 50 basis point cuts by January next year, but a case for 50 basis point cuts at the next meeting just does not exist,” said Parker.

There is now nearly 86.0% possibility that the Fed’s target range for the federal funds rate will be cut by a quarter percentage point to 4.5% to 4.75% in November, according to the CME Group’s FedWatch tool. Meanwhile, the chance of the rate remaining at 4.75% to 5% stands at 14.0%. Investors will take more cues from the US Consumer Price Index  (CPI) inflation data, which is due on Thursday. This report could offer some hints about the US inflation trajectory and influence the Fed about the future US interest rate outlook. 

Source: FXSTREET

Source: AP

US Stocks Crash as Rate Cut Expectations Pull Back – Nasdaq Down 1.2%

Dollar Gains Momentum at Highs

Quiet Trading Day Ahead

India’s new monetary policy committee may lay the groundwork for an interest rate cut on Wednesday as a wave of global easing kicks off and growth in the world’s fastest-expanding major economy moderates.

While most of the 35 economists in a Bloomberg survey expect the Reserve Bank of India’s six-member MPC to keep the repurchase rate unchanged at 6.5%, several predict a switch to a "neutral" stance for the first time since June 2019 from its current hawkish view.

The meeting is the first under a new policy committee following the appointment last week of three external members, well-known economists with academic and financial backgrounds.

Governor Shaktikanta Das has so far dismissed calls for rate cuts, concerned that high food prices will prevent inflation from staying at the 4% target level on a sustainable basis. However, with the US Federal Reserve now pivoting and other central banks following with rate cuts, pressure is building on the RBI to do the same, especially after good rainfall and predictions of a bumper harvest.

A change in the RBI’s policy stance language would pave the way for a quarter-point rate cut in December, according to economists at HSBC plc.

“We believe the RBI doesn’t gain from waiting any longer,” Pranjul Bhandari and Aayushi Chaudhary wrote in a note. They expect another quarter-point reduction at the February meeting, taking the repurchase rate to 6%.

New MPC makes its debut

Three new external members joined the MPC, although only one of them — Saugata Bhattacharya, a former chief economist at Axis Bank Ltd — has publicly voiced his views on inflation and growth recently, advocating for the RBI to cut rates.

However, economists said it’s unlikely the new members will vote against the three other RBI officials on the MPC so early on. 

They “may agree with RBI’s house view for some time,” said Rahul Bajoria, an economist at Bank of America Corp. “Still, incoming near-term data is much more mixed, and growth risks appear tilted to the downside,” he said, predicting a shift in policy stance. 

In the past two MPC meetings, external members Ashima Goyal and Jayanth Varma voted for rate cuts, stating and arguing that the RBI’s insistence on keeping rates high was damaging growth.

Inflation rhetoric may be toned down

The RBI will likely stick to its fiscal year growth and inflation forecasts of 7.2% and 4.5%, respectively, although there’s a chance the quarterly CPI forecasts could be adjusted, particularly for the July-September period, said Kaushik Das, an economist at Deutsche Bank AG. 

The central bank had projected 4.4% inflation for the period, but the actual reading could turn out to be lower, in the range of 4-4.1%, he said. 

India had its best monsoon rains, which irrigate about half of the country’s farmland, since 2020, setting the stage for a bumper harvest of crops such as rice and boosting economic prospects for rural areas.

Since the last rate decision, official data showed economic growth moderated to 6.7% in the April-June quarter, below the central bank’s projection of 7.1%, while signs are growing of a softening in urban consumption.

“The Indian economy is showing few incipient signs of fatigue in growth,” wrote Upasna Bhardwaj, chief economist of Kotak Mahindra Bank Ltd in a note on Monday. “The upcoming festive and post-festive periods will be important to evaluate whether these signs turn to red flags or just a blip,” she wrote. 

Several economists have started moderating their growth projections for India — for example, Kotak’s Bhardwaj now expects 6.7% expansion in the year through March 2025, down from 6.9% earlier.

Bond markets could rally

Any signs of dovishness from the central bank, such as a tweak in the policy stance language, could propel a bond rally. Traders are also watching any possible changes that could indicate easier liquidity conditions in the banking system. Yields have eased around 40 basis points from the year’s peak of 7.25% on hopes of RBI easing.

“The next move from the RBI will be a rate cut,” said Nathan Sribalasundaram, a rates strategist at Nomura Holdings Inc in Singapore. “Favourable demand-supply, banks’ investment requirements and foreign investor demand will push yields lower.”

Source: The edge markets

The Thai government’s attempts to influence the appointment of a new central bank chairman could lead to “disastrous consequences” for Southeast Asia’s second-largest economy, according to a former Bank of Thailand (BOT) governor.

Tarisa Watanagase, the nation’s first female central bank governor, said the push to appoint a government nominee as the BOT chairman will affect the independence of the monetary authority.

Her comments come as local media reported that a panel of retired bureaucrats and regulators will meet on Tuesday to select the chairman and two board members from a roster put forward by the Finance Ministry and the central bank. Both have been at loggerheads over monetary and fiscal policies for almost a year.

“In the past, the selection committees for important positions of the Bank of Thailand have performed their duties independently and have not accepted interference,” Tarisa wrote in an open letter published Monday. “No one wants to be recorded in history as people responsible for bringing the Thai economy to the first step of disaster.”

The selection panel should ensure the BOT new chairman and board members can “perform their duties appropriately” and are acceptable to society, said Tarisa who was appointed governor by an interim government following the 2006 military coup.

Prime Minister Paetongtarn Shinawatra’s administration is backing Kittiratt Na-Ranong, a critic of the central bank’s hawkish monetary policy and a loyalist of the ruling party, for the chairman’s job. BOT hasn’t disclosed its nominees for the post.

While the BOT chairman doesn’t have powers to dictate monetary policy, the official can evaluate the central bank governor’s performance. The chairman also has a say in which outside experts join the seven-member rate panel headed by Governor Sethaput Suthiwartnarueput, who is due to retire in September next year.

Sethaput, who was appointed by a military-backed government in 2020, has ignored calls for a rate cut from the Pheu Thai-led coalition government for almost a year. While former leader Srettha Thavisin openly called for easing borrowing costs, Paetongtarn has left it to her cabinet colleagues to keep up the pressure on BOT.

The Finance Ministry is pushing for a higher inflation target for next year to create room for BOT to cut the interest rate from a decade-high 2.5%. Sethaput has argued that the current settings are neutral for Thailand’s economic and financial conditions and called for central bank decisions to be free from interference.

Tarisa said government interference can damage the Thai economy by focusing on policies stimulating the economy in the short term. A decision to hand out 10,000 baht each to most adults is already set to create a huge financial burden which can lead to credit rating downgrades, she said.

Source: The edge markets

The EUR/USD pair extends its recovery to around 1.0985 on Tuesday during the early European trading hours. The major pair edges higher amid the modest weakening in the US Dollar (USD). However, the upside for EUR/USD might be limited as traders expect a smaller interest rate cut from the US Federal Reserve (Fed) in November.

French Central Bank Chief Francois Villeroy de Galhau said on Tuesday that the European Central Bank (ECB) would cut interest rates next week as economic growth is weak and this raises the risk that inflation will undershoot its 2% target. The comments support market pricing for another 150 bp of ECB rate cuts over the next twelve months.

ECB Isabel Schnabel is set to speak later on Tuesday, and Industrial Production in Germany will be released. The dovish remarks from ECB policymakers or any sign of weakness in Europe's largest economy could drag the Euro (EUR) lower against the Greenback. 

On the USD’s front, the encouraging US jobs data on Friday raised the expectation that the Fed will cut 25 basis points (bps) at the central bank's November meeting. This, in turn, might lift the US Dollar (USD) broadly and might cap the upside for EUR/USD. The odds of a Fed rate cut of 25 bps stand at an 85% chance, up from 31.1% last week, according to the CME FedWatch Tool.

Source: FXSTREET