Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
Wild ride sees USD lower
Yesterday’s flurry of news events saw a roller-coaster ride across markets with a Bank of Japan rate hike and signs of a potential Federal Reserve rate cut in September causing the USD/JPY to fall almost 2.0% yesterday.
Overnight, the US Federal Reserve kept rates steady but chair Jerome Powell signaled a cut was likely in September saying: “The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate.”
US shares surged on the news with the S&P 500 up 1.6% and the Nasdaq up 2.6% — the best one-day gains since February.
US bond yield tumbled and the US dollar fell with the USD index down 0.4% as it fell to two-week lows.
In Australia, a lower-than-expected reading from the trimmed mean CPI saw a massive reaction in local bond markets, with the two-year bond yield’s largest net drop in over a year. These markets have now priced out any chance of a hike next week (source: Bloomberg).
At the end of a wild day of trading, the AUD/USD gained 0.1% while the NZD/USD climbed 0.9%.
The Japanese yen surged versus all major currencies after the BoJ’s hike.
The USD was sharply lower across Asia with the USD/CNH down 0.4% while the USD/SGD lost 0.5%.
Pound eyes BoE rate decision
Looking forward, we might see more volatility, with the Bank of England due at 9.00pm AEST. We continue to believe that, at its August meeting, the Bank will lower rates by 25 basis points for the first time this cycle.
There has been mixed data since the last meeting, with stronger services inflation but lower pay. However, we think that there has been enough time with restrictive rates and softer data to support a reduction.
We’re looking for a 5-4 vote split in favor of easing because we believe the decision is extremely close.
The GBP has been mostly resilient in 2024 and even a rate cut from the BoE might not lead to any persistent weakness.
IDR still pressured
The Indonesian rupiah remains mostly pressured and a potentially weaker CPI number is unlikely to help.
As a result of decreasing food price inflation, especially lower onion and red chili prices, we anticipate headline CPI inflation to slightly decline to 2.3% y-o-y in July from 2.5% in June.
However, because of persistent inflation in personal care and other services, we anticipate that core inflation will stay unchanged in July at 1.9% y-o-y.
We remain somewhat pessimistic about IDR given the weak fundamentals. The USD/IDR has remained above 16,000 key psychological handle, nearing all-time highs since 1998 of 16,850.
US dollar down after Fed
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 29 July – 3 August
All times AEST
*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.
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