Source: Poundsterlinglive

NZD/USD edges higher to near 0.6200 during the early European hours on Wednesday. The upside of the NZD/USD pair could be attributed to the improved risk sentiment ahead of the Federal Open Market Committee’s (FOMC) monetary policy meeting scheduled for Wednesday.

The US Dollar (USD) loses ground amid rising expectations that the US Federal Reserve (Fed) may announce a substantial 50 basis point rate cut on Wednesday. The CME FedWatch Tool indicates that markets are assigning a 37.0% probability to a 25-basis-point interest rate cut, while the likelihood of a 50 basis point cut has risen to 63.0%, up from 62.0% just the previous day.

Additionally, lower US Treasury yields contribute to the downward pressure for the Greenback. The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major currencies, retraces its recent gains from the previous session. The DXY trades around 100.80 with 2-year and 10-year yields on US government bonds standing at 3.60% and 3.64%, respectively, at the time of writing.

UOB Group FX strategists Quek Ser Leang and Lee Sue Ann highlighted that the New Zealand Dollar (NZD) is unlikely to see significant further gains in the short term. Instead, they expect the NZD to trade within a range of 0.6160 to 0.6205. Over the longer term, they anticipate a broader trading range between 0.6135 and 0.6235.

On Wednesday, New Zealand's Current Account deficit expanded to NZD 4.826 billion in the second quarter, up from a deficit of NZD 3.825 billion in the previous quarter. The Q2 deficit exceeded market expectations, which had predicted a trade deficit of NZD 4.0 billion.

Additionally, traders will be closely monitoring New Zealand's Gross Domestic Product (GDP) data for the second quarter, set to be released on Thursday. The GDP is expected to contract by 0.4% quarter-on-quarter in Q2, following a 0.2% expansion in Q1. On an annual basis, economic growth is projected to decline by 0.5%, compared to the previous 0.3% growth.

Source: FXSTREET

Israel’s intelligence service planted explosives in several thousand pagers that Hezbollah had ordered from Taiwan, Reuters has reported in the wake of deadly pager explosions that killed nine in Lebanon earlier this week.

Among those injured in the Tuesday explosions was Iran’s envoy to Lebanon, which might prompt another threat from Iran to Israel in what would be the latest step in a long escalation dance and one more bullish factor for oil amid a scarcity of bullish factors.

According to Reuters sources who remained unnamed, “The Mossad injected a board inside of the device that has explosive material that receives a code. It's very hard to detect it through any means. Even with any device or scanner.”

Such a code was sent to 3,000 of the low-tech devices that Hezbollah uses for communication and those exploded simultaneously, the Reuters sources said, with one noting that Mossad had concealed up to 3 grams of explosive material in each pager.

“This would easily be the biggest counterintelligence failure that Hezbollah has had in decades,” a former U.S. deputy national intelligence officer for the Middle East told Reuters.

Following the attack, Lebanese authorities and Hezbollah itself blamed it on Israel, even before the information about the pagers emerged, and Hezbollah said it would retaliate. The Lebanese authorities noted that there were civilians among the victims.

“It sends a significant message to Hezbollah leadership that, ‘We can get you anywhere,’” Randa Slim, a director at the Middle East Institute think tank in Washington, told the Wall Street Journal. “And it very much affects morale.”

“The war on the border is no longer on the border—with this attack it has expanded into their homes and shopping places around Lebanon,” Slim also said.

Israel has already signaled it does not mind using forceful means to return people evacuated from the northern part of the country, which borders Lebanon, to their homes, to which end Hezbollah attacks in the area must be stopped.

Source: OILPRICE

UK inflation held at just above the Bank of England (BOE)’s 2 per cent target in August, leaving the door open to further interest-rate cuts later this year. 

Consumer prices rose 2.2 per cent from a year earlier, the same pace as in July and undershooting the BOE’s forecast, the Office for National Statistics said on Sep 18. The reading was in line with the median expectation of economists surveyed by Bloomberg. Downward pressures from motor fuels were offset by an upward push from air fares.

The figures are likely to keep the BOE on track for a further loosening in policy later this year after it cut rates for the first time since the pandemic on Aug 1, citing easing underlying inflation.

Services inflation, a key gauge being watched closely by the BOE, rose to 5.6 per cent in August from 5.2 per cent in July. However, a pickup had been widely anticipated and is expected to prove temporary. Both services inflation and the headline rate are running below levels forecast by the BOE in August. 

While policymakers are expected to leave rates unchanged at 5 per cent at their decision on Sep 19, market expectations of further easing have been mounting. Traders are pricing in cuts for both November and December with five more to follow in 2025.

The BOE decision this week will be announced a day after the Federal Reserve is expected to kick off its own easing cycle amid fears about the health of the US economy. 

Source: Straitstimes

The Pound Sterling (GBP) gains against its major peers in Wednesday’s London session as the United Kingdom (UK) inflation data for August came in hotter than expected. The Office for National Statistics (ONS) reported that the core Consumer Price Index (CPI) – which excludes volatile items such as food, energy, oil and tobacco – rose by 3.6%, more than the 3.5% estimated and accelerating from 3.3% in July.

Services inflation, a closely watched indicator by Bank of England (BoE) officials, rose sharply to 5.6% from 5.2% in July. This acceleration in inflation could force traders to pare back bets supporting one more interest rate cut by the Bank of England (BoE) in the remainder of the year.

Headline inflation, meanwhile, rose by 0.3% and 2.2% on a monthly and annual basis, respectively, meeting analysts' expectations.

Going forward, investors will focus on the BoE’s monetary policy announcement on Thursday. Before inflation data came out, markets were already expecting the BoE to leave interest rates unchanged at 5%. With August data signaling that inflation remains stubborn, market expectations for rates remaining at their current levels by the year-end may increase.

Daily digest market movers: Pound Sterling outperforms US Dollar ahead of Fed meeting

The Pound Sterling jumps to near 1.3170 against the US Dollar (US) after the release of the hot UK inflation data for August. The GBP/USD pair aims to reclaim the immediate resistance of 1.3200. The Cable is expected to face volatility as the Federal Reserve’s (Fed) monetary policy decision will be announced at 18:00 GMT.

According to the CME FedWatch tool, the central bank is certain to start reducing interest rates. This will be the first interest rate cut decision by the Fed in over four years. However, the debate is over the pace by which key borrowing rates will be reduced. 30-day Federal Funds Futures pricing data shows that the probability of the central bank cutting rates by 50 basis points (bps) to 4.75%-5.00% is at 65%, while the rest favors a 25-bps rate cut.

The Fed will pivot to policy normalization as the latest commentaries from officials indicated that the central bank is more concerned about deteriorating labor demand rather than inflation.

Apart from the Fed’s policy decision, investors will also focus on the Fed’s dot plot, economic projections and the press conference of Fed Chair Jerome Powell after the interest rate decision. The Fed dot plot indicates the collective forecast for the federal fund rate by all policymakers in the medium and long term.

Technical Analysis: Pound Sterling aims to reclaim 1.3200

The Pound Sterling approaches 1.3200 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3100. Earlier, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.

The 14-day Relative Strength Index (RSI) stands around 60.00. A fresh round of bullish momentum could occur if the oscillator sustains around this level.

Looking up, the Cable will face resistance near the August 27 high of 1.3266 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.

Source: FXSTREET

USD: We expect a dovish 25bp cut today

Today’s Fed rate decision (1900 BST) is as close as it gets. Markets have recently leaned narrowly in favour (65%-35% implied probability) of a 50bp cut rather than 25bp. Our full preview of the September FOMC explains why we called for 25bp last week. Admittedly, after recent media reports and the market pricing in a greater chance of 50bp, this is now an exceptionally close call.

We discussed in yesterday’s FX Daily how a 50bp cut may well be the consequence of the market itself having given the Fed the last push to a larger reduction via dovish repricing. You can easily see the key risk for the Fed here: Chair Jerome Powell would need to provide solid macro justifications for a half-point move to avoid sounding too sensitive to market rate expectations. Incidentally, Powell would need to show the 50bp cut isn’t a “panic” move: i.e. the Fed is not overly worried about recession and the jobs market. Failing to offer such reassurance can cause turmoil in equities.

As discussed, we see 25bp as slightly more likely. However, we believe the Fed would accompany a more cautious cut with dovish messaging. That could include a few members voting for 50bp and Powell opening the door to larger cuts ahead. Dot Plot rate projections will be a major communication channel. We expect the median value to be revised to signal a total of 75bp of easing this year and a further 125bp next year. That would fall short of the 115bp and 135bp priced in by the markets for 2024 and 2025, but if paired with a dovish press conference, the projection will hardly prevent any dovish deviations moving on.

A 25bp cut will likely lead to a dollar rally due to a mechanical shift higher in the OIS curve. However, if we are right with our expectations of a dovish press conference by Powell, the dollar may well struggle to hold on to gains beyond the very short-term.

EUR: Correction today, but rebound later

There are no major data releases in the eurozone today, and we expect EUR/USD to trade in tight ranges until the FOMC announcement this evening. The transmission channels from the Fed cut to EUR/USD are the USD short-term rate impact first, and the equity reaction second. If the Fed cuts by 50bp and markets read that as a panic move, USD weakness may be channelled via EUR, JPY and CHF, while higher-beta currencies (like NOK and SEK) may take a hit.

In our base case (dovish 25bp cut), EUR/USD moves back below 1.110, but gradually recovers ground in the coming days. By the time the next big things happen in markets (US PCE, US jobs report), EUR/USD may be back at 1.11-1.12.

On the ECB side, another hawkish-leaning Governing Council member, Gediminas Simkus, said that an October cut is unlikely. Markets are only pricing in 7bp, and we also expect the next reduction in December. That said, if the Fed cuts by 50bp today, there will be growing pressure on the ECB to frontload some easing as well.

GBP: Inflation confirms no cut tomorrow

UK inflation for August came in perfectly in line with consensus this morning. Headline CPI was unchanged at 2.2% YoY, while the core index accelerated from 3.3% to 3.6% as expected. The closely-monitored services inflation also accelerated in line with consensus, from 5.2% to 5.6%.

This morning’s numbers all but confirm that the Bank of England should keep rates on hold tomorrow. There is a residual 6bp of easing priced though for the meeting, suggesting a bit more room for short-dated Sonia swap rates to readjust higher, after falling throughout September.

The pound is trading on the front foot after CPI data and may find a bit more support tomorrow. That said, the FOMC event today may be a bigger event for GBP markets. A 25bp cut can send GBP/USD back below 1.3100, but if Powell is as dovish as we expect, Cable may well find good support before touching the recent 1.3015 lows.

CEE: More cuts discussion

The rather quiet atmosphere of this week should continue today in the CEE region. The calendar has nothing to offer but we have several speakers scheduled in the region today. The Czech National Bank (CNB) blackout period will start this afternoon ahead of next week's Wednesday's meeting. Potentially we may hear something from board members, however it seems that a 25bp rate cut to 4.25% is a safe call. The question remains what to expect next?

Our economists are on the hawkish side with a pause in the cutting cycle in December and February with 3.75% at the end of the first quarter while the market is pricing in 3.25%. Still, in the short term, we find market pricing justifiable given the weaker economic numbers. On the other hand, the terminal rate at 2.75% priced in goes against the CNB's main tone at the moment. We think this could be a source of support for the CZK next week. EUR/CZK bounced down from 25.150 yesterday, although this was our view, our reasons have not yet materialised and the rate differential remains rather lower. So the real trigger is more likely to be the CNB meeting next week.

In Hungary, the prime minister is scheduled to address the European Parliament today, which may trigger some headlines. EUR/HUF is almost fully back to pre-fiscal headlines levels from last week and although we still see some room to the downside, the main potential is gone. On the other hand, next week's National Bank of Hungary meeting is scheduled which will significantly hinge on the Fed's decision today in our view. However, our economists see a 25bp rate cut as the baseline, which, if the Fed is dovish, could promise more rate cuts in the future, leaving the HUF exposed.