GBP/USD struggles to capitalize on modest intraday gains beyond 1.3100 mark

The GBP/USD pair attracts some buyers during the Asian session on Tuesday and for now, seems to have snapped a five-day losing streak to a nearly four-week low, around the 1.3560 area touched the previous day. Spot prices, however, struggle to build on the uptick beyond the 1.3100 mark, warranting some caution for bullish traders.

The US Dollar (USD) remains depressed below a seven-week high touched on Friday and turns out to be a key factor lending some support to the GBP/USD pair. That said, reduced bets for another oversized interest rate cut by the Federal Reserve (Fed), amid signs of a still resilient US labor market, might hold back the USD bears from placing aggressive bets. Apart from this, a softer risk tone should act as a tailwind for the safe-haven buck and cap the upside for the currency pair. 

GBP/USD finds fresh lows as Greenback climbs

GBP/USD sunk another one-quarter of one percent on Monday, easing into a fresh four-week low and closing below the 1.3100 handle for the first time since mid-September. Investors rate cut hopes are buckling under the weight of a firmer-than-expected US labor market, and geopolitical tensions have kept trader risk appetite pinned.

Investor appetite took a leg down to kick off the fresh trading week as market hopes for further outsized rate cuts continue to dwindle. Rate markets now overwhelmingly expect the Fed’s next rate move on November 7 will be a demure quarter-point cut, down from the heady 50 bps that rate markets expected just after the Fed’s opening volley of a 50 bps double cut in September. Fedspeak has steadily telegraphed to markets that a further deterioration in the US economy, and specifically the US labor market, will be the thing that opens the door to further extreme moves on rates. 

Source: FXSTREET

US bonds tumbled on Monday, deepening a rout triggered by strong labor-market data that caused traders to sharply ratchet back bets on aggressive Federal Reserve interest-rate cuts.

The declines pushed key yields above 4%, levels last seen in August, as investors abandoned their bullish bets on Treasuries. For the first time since Aug. 1, money markets imply fewer than 50 basis points of rate reductions through the end of the year. Traders now see just an 80% chance the Fed cut rates by even 25 basis points in November.

“The discussion is shifting into whether there’s going to be a cut at all,” said Jan Nevruzi, an interest-rate strategist at TD Securities. “Things are not looking as bad from an economic perspective, and that leads you to reprice the Fed.” TD continues to expect a quarter-point cut in November.

The 10-year yield rose as much as six basis points to 4.03%, while the two-year yield jumped as much as up ten basis points to 4.02%. The underperformance in shorter-dated Treasuries saw a key part of the yield curve briefly re-invert. Historically, bond yield curves slope upward with longer notes paying higher yields, a norm that was disrupted for almost two years as the Fed hiked rates aggressively.

The moves reflect a revival of expectations in the bond market that the Fed will pull off a “no landing” scenario – a situation where the US economy keeps growing, inflation reignites and the Fed has little room to cut interest rates. Friday’s report revived a set of worries around overheating, spoiling a five-month run of gains in Treasuries.

“We’ve expected higher yields, but anticipated a somewhat gradual adjustment,” Goldman Sachs Group Inc. strategists including George Cole wrote in a note. “The extent of strength in the September jobs report may have accelerated that process, with renewed debate on the extent of policy restriction, and, in turn, the likely depth of Fed cuts.”

Monday’s open interest data, which tracks positioning in the futures market, fell sharply across multiple contracts linked to the Secured Overnight Financing Rate, signaling capitulation of long positions. Meanwhile in the options market, there were a bunch of new hawkish hedges targeting just one more quarter-point rate cut for this year.

Economists at Citigroup in a report Monday said they expect the Fed to cut rates by a quarter point in November, joining other Wall Street banks in abandoning forecasts for a half-point cut in the wake of strong September employment data released Friday.

“The bar for no rate cut in November is high, as one month of labor market data has not convincingly reduced the downside risks that have been growing for many months and across many datasets that led officials to cut 50bp in September,” Veronica Clark and Andrew Hollenhorst wrote. “We think labor market weakness will reemerge in the coming months and an overall still-slowing trend of inflation will have Fed officials cutting rates by 50 basis points in December.”

Traders are now looking ahead to a series of speeches from Fed policymakers for further clues on the path for rates. Minneapolis Fed President Neel Kashkari, as well as his Atlanta and St. Louis counterparts, Raphael Bostic and Alberto Musalem, along with Fed Board member Michelle Bowman speak at different events on Monday.

The market is also awaiting US inflation data later this week. The consumer price index is expected to rise 0.1% in September, its smallest gain in three months. Fed Chair Jerome Powell has said projections issued by officials, alongside their September rate decision, point toward quarter-point rate cuts at the final two meetings of the year.

“It doesn’t need a recession to get inflation to tolerable levels, so the Fed is easing policy without waiting for genuine economic weakness,” said Dario Perkins, managing director at TS Lombard. “By now, everyone should have realized the Fed is cutting rates preemptively.”

Source: The edge markets

RBA September Meeting Minutes 

Macro:

Federal Reserve Bank of St Louis president Alberto Musalem said on Monday that he supports more interest rate cuts, as the economy moves forward on a healthy path, while noting that it is appropriate for the central bank to be cautious and not overdo easing monetary policy.

"Further gradual reductions in the policy rate will likely be appropriate over time," the official said at a meeting of the Money Marketeers of New York University, noting that "patience" has served the Fed well. "I will not prejudge the size or timing of future adjustments to policy."

Musalem, who took office earlier this year and who does not hold a vote on the rate-setting Federal Open Market Committee (FOMC), spoke as the interest rate outlook has once again been upended.

On last Friday, the government reported data showing unexpected and very vigorous strength in the job market, which called into question widespread concerns that the labour sector was weakening. Last month, the Fed cut its interest rate target by half a percentage point to between 4.75% and 5%, because inflation pressures have waned considerably amid ample signs that the job market was growing softer.

The Fed had also penciled in half a percentage point's worth of cuts into the close of the year. But the strength of hiring in September has now called into question how aggressive the Fed will need to be with rate cuts.

Musalem noted that he supported the Fed's latest rate decision and said his outlook for monetary policy is "slightly above the median" projected by his colleagues. Fed officials see the federal funds rate around 4.4% by year end, and at 3.4% by the end of 2025, based on forecasts released at the September policy meeting.

Musalem argued for a cautious pace of rate cuts, even as he noted that he expects inflation to move back to 2% on a 12-month basis over the next few quarters, and sees the current state of the job market as consistent with a strong economy.

"Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late," Musalem said. "That is because sticky or higher inflation would pose a threat to the Fed's credibility, and to future employment and economic activity," he said.

The official also said the September jobs data that rattled expectations was strong, while noting "the path I penciled in" for monetary policy at the most recent Fed policy meeting is "probably still appropriate".

"I believe the risks that inflation becomes stuck above 2%, or rises from here, have diminished," he added.

Musalem also noted financial conditions generally remain supportive of economic activity. He said he expects the expansion to continue but noted that uncertainty about the outcome of the Nov 5 US elections was causing some firms to hold back until they had more clarity.

Based on feedback from his district, Musalem said "I've heard enough 'survive until 2025' comments from business people and others, to believe that resolving some uncertainty about the path for interest rates or the election could provide a meaningful boost to investment and spending".

Musalem also said he saw no conflict between the Fed cutting rates and pressing forward with ongoing efforts to shrink the size of its balance sheet, a process known as quantitative tightening, or QT.

Musalem brushed aside worries about turbulence at the end of the third quarter in short-term markets that some investors saw. He argued for a near-term end to QT, noting that the Fed retains firm control over its interest rate target. As of July, market participants in a survey expected a spring end to QT, based on New York Fed data.

Source: The edge markets

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