Written by Convera’s Market Insights team
Markets commit to September cut
Boris Kovacevic – Global Macro Strategist
Global markets had a significant dovish bias going into yesterday’s FOMC meeting and Jerome Powell did little to nothing to dispel the expectations of lower interest rates ahead. The policy rate remained unchanged at 5.25% – 5.50% as expected. However, putting rate cuts on the table for September and acknowledging the recent cooling of the labor market have been enough for investors to commit to pricing in easer policy.
Markets are now anticipating the Federal Reserve to cut interest rates five consecutive times starting in September, leaving the Fed funds rate at 4.00% – 4.25% in March 2025. This is significant and presupposes a continued bout of disinflation and weaker US macro data. For now, investors are welcoming the fall of yields to the lowest level since January with open arms. The Nasdaq index pushed higher by more than 2.5% and the Brent crude oil price soared 3.5%. The US dollar fell against most its peers as the focus continued to remain on USD/JPY. The currency pair is on track to fall for a fourth consecutive week and is down 7.5% in that period.
The FOMC has said that they remain committed to the dual mandate and are attentive to inflations risks. Both inflation and labor market data, of this the latter is coming up on Friday, will therefore matter for future policy decisions. Today’s risk event comes in the form of the ISM manufacturing PMI, which has recently slipped back under the important 50 mark separating contraction from expansion.
BoJ, Fed done – BoE next
Boris Kovacevic – Global Macro Strategist
The Bank of Japan raised interest rates, while Fed Chair Jerome Powell opened the door for rate cuts in September. Neither event seems to have impacted the British pound as investors remain cautious ahead of the Bank of England decision. Most meetings in London over the past year or so have been well telegraphed and were therefore not seen as major risk events. That is not the case for today’s decision as both economists and markets remain split on whether the doves will be able to push through a rate cut in the end.
The main argument for a policy easing is the fact that the real rate (policy rate – inflation) is much higher than in the United States and Eurozone. Headline inflation has fallen to 2.1%, while the benchmark rate remains at 5.25%. The argument of the hawks within the Monetary Policy Council (MPC) would be that the economy is doing just fine, having grown by a solid 0.7% in Q1. Services, rent, and wage inflation remain elevated and appear to be somewhat sticky, while leading indicators point to a slight reacceleration of inflation. Markets seem to believe that the Bank of England will still commit to a cutting cycle as the 2-year yield continues to decline, reaching its lowest level since March 2023 at 3.8%.
GBP/USD remains flat on the week but could make up the lack of volatility today (BoE) and tomorrow (US labor market report). The intra-week range of $1.2800 to $1.2880 is likely to be broken with the two big risk events coming up.
Euro trends higher as inflation runs too hot
Ruta Prieskienyte – Lead FX Strategist
The annual inflation rate in the Euro Area unexpectedly accelerated to 2.6% in July, driven by higher energy prices. Regionally, prices rose faster in Germany, France, and Italy but eased in Spain. The core rate, which excludes food, energy, alcohol, and tobacco prices, held steady at 2.9%, compared to expectations of 2.8%, while services inflation eased to 4%, marking the first decline in three months. These figures present a challenge for the ECB, which paused policy loosening in July to await more evidence on price pressures. While investors anticipate a cut in borrowing costs in September (with 24bps priced into the OIS curve), officials have stressed that their decision will depend on several upcoming indicators.
The broad Euro index marginally retreated, driven by losses against APAC G10 peers and the Swiss Franc. EUR/JPY fell approximately 1.7% DoD after the BoJ hiked its policy rate for the second time this year by 15bps to a 15-year high of 0.25%, signalling more tightening to come. EUR/AUD briefly reached a five-month high of A$1.67 on Wednesday amid a sharp 22bps drop in the AU 2-year bond yield, the third-largest one-day net rate rally in a decade, following a downside surprise in Australian Q2 CPI.
Key events today include the Eurozone unemployment report and the BoE rate decision, both of which are expected to significantly impact the market. Overnight EUR/GBP ATM options volatility surged to an eight-month high of 9.5 vol. With the market leaning towards a BoE cut, EUR/GBP could surge above 0.85, a level not seen since the French snap election, as investors unwind stretched long pound positions.
Gold pops after the Fed, geopolitical headlines
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 29-August 02
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
