Written by Convera’s Market Insights team
Sentiment improves as dust settles
George Vessey – Lead FX Strategist
US stocks surged higher yesterday with the S&P500 rising 1.7% to reach a new record high whilst the Nasdaq jumped 2.4%, as market participants continue to digest the latest Federal Reserve (Fed) decision. The Fed delivered a jumbo 50bps rate cut, the first decrease in borrowing costs in four years, and signalled further reductions ahead for this year and next.
The Fed believes the disinflation trend remains in place and see making unemployment their top priority as the labour market has weakened. In the immediate aftermath of the decision, the risk rally fizzled out as Fed Chair Powell cautioned against assuming big cuts would continue though. Still, there was a big shift lower in the Fed’s predictions for where US interest rates will be at the end of this year and next. Markets still see another 70bps of easing before year-end, versus the Fed’s expected 50bps. Treasury yields are higher across most of the curve but with long-end yields rising faster, this means Treasuries are bear steepening and this has restrained the risk rally somewhat.
Meanwhile, it was interesting to see yesterday that initial jobless claims posted their lowest reading (219k) since May, with continuing claims also coming in under expectations. As a result, it’s hardly suggestive of a labour market cooling enough to warrant another jumbo cut before the year is up like markets are expecting. However, if the Fed is perceived as unwilling to disappoint market expectations, investors may continue to prefer leaning dovish and the dollar should therefore continue trading on a softer note.
Yen gains after BoJ holds
George Vessey – Lead FX Strategist
The Bank of Japan (BoJ) held monetary policy settings steady on Friday, signalling it sees no need to hurry with interest rate hikes despite data released earlier showing the nation’s key inflation gauge accelerated in August for a fourth consecutive month.
The Japanese yen has strengthened marginally across the board, up about 0.2% against the USD and EUR this morning. Markets were expected the BoJ to stand pat, so it’s no surprise Japanese officials did, to avoid a repetition of the market meltdown that followed its surprise hike in July. Since the summer hike, the yen has strengthened around 11% against the US dollar and has reached fresh 1-year lows under the 140 handle. But the yen has had a tough week this week, on track to record only its third weekly loss since July versus the dollar, pound and euro.
With rate differentials narrowing in favour of the yen, due to more hikes expected by the BoJ while other central banks are cutting rates, we expect the yen to continue strengthening going into year-end and 2025.
Pound approaching multi-year highs
George Vessey – Lead FX Strategist
The Bank of England (BoE) left its interest rates unchanged as expected on Thursday. The Monetary Policy Committee voted by a majority of 8–1 to maintain Bank Rate at 5%. This helped push the pound to fresh highs against its peers, with GBP/EUR reclaiming €1.19, near 2-year peaks and GBP/USD breaking above $1.33 for the first time since early 2022.
BoE Governor Andrew Bailey’s emphasized the requirement for policy to stay restrictive for “sufficiently long” and that most members saw the need for a gradual approach to removing restraint. We think GBP/USD will continue to head higher in the coming months, helped by narrowing nominal and real interest-rate differentials working in its favour. Further supporting sterling was the upbeat UK retail sales prints this morning, which came in well above expectations. However, the economic backdrop is showing signs of moderating, which could limit gains. Activity data has cooled recently and UK consumer confidence has fallen sharply to its lowest level in six months as households nervously await next month’s autumn Budget.
The rising prospect of tighter fiscal policy at the upcoming Budget could stifle UK growth prospects and might spur a dovish recalibration in the BoE policy outlook. Because the pound has benefited from the UK’s relatively high interest rates relative to elsewhere, expectations for an accelerated rate cutting cycle poses downside risks to the currency.
Euro momentum slows below $1.12
Ruta Prieskienyte – Lead FX Strategist
The euro trended mildly higher from Thursday’s open as the FX market continued digesting the first Fed rate cut and assessed a wave of ECB speeches. Meanwhile, other euro assets reacted more strongly—stocks surged over 1%, celebrating the jumbo Fed cut, while bonds also gained, outperforming US Treasuries.
The economic calendar offered little in terms of market-moving data, but several ECB speakers shared their views. Despite the lack of clarity on future policy, an October rate cut appears unlikely, with only 6bps priced in. ECB hawks continue to push against a back-to-back cut, with ECB’s Knot backing the current market stance, indicating openness to further cuts if inflation follows the ECB’s projections. Meanwhile, Schnabel’s neutral stance on inflation being sticky left little indication about her stance, reinforcing the cautious outlook for October. Admittedly that in itself is quite a change of tone from her previous hawkish speech several weeks ago. However, there may be shifts by the December meeting. ECB’s Centeno, a dovish voice, suggested that the ECB might accelerate rate cuts if inflation undershoots forecasts. This has already led markets to start pricing in deeper ECB cuts in 2025 since a few weeks ago, reflecting similar expectations around the Fed’s policy easing.
Simultaneously, political risks in France have resurfaced, flying under the radar but significant for the euro. France missed a deadline to present a credible plan for reducing its debt and deficit, raising concerns. This drove the 10-year French OAT-Bund spread to a month-high of 74.7 basis points and slightly increased the implied volatility of the 3-month CAC 40 index. If left unresolved, these political risks could weigh on the euro in the coming weeks.
Pro-cyclical FX flexing muscles
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 16-20
All times are in BST
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*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.
