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A momentous day for the US dollar and the Fed presents major risks for currency markets.
Better than expected retail sales helped the US dollar steady itself ahead of the Federal Reserve’s highly anticipated interest rate decision this evening.
After falling through the European session, news that American retail sales ticked up by 0.1% month-on-month in August (beating forecasts of a decline) helped the US dollar nudge into positive territory against the pound and the euro. Sterling lost half a cent to the euro, underlining the risks of its own central bank set piece.
In the somewhat starchy world of currency, its hard to find a moment that elicits genuine excitement. Jerome Powell will be at the centre of one of these rare moments tonight. His decision, whether to cut by 0.25%, 0.5%, or perhaps an ever bigger surprise, could dictate whether the global economy achieves a “soft landing”. It could also lead to significant volatility in currency markets.
Just hours after Powell steps up in Washington, Andrew Bailey will do the same in London. Market bets that the Bank of England could cut interest rates by 0.25% tomorrow have been creeping up this week. Based on recent data, traders are implying a 40% likelihood that policymakers will cut rates to 4.75%, up from 20% on Monday. That is a reaction to the Federal Reserve’s potential path as well as sluggish growth figures in July.
Bailey’s decision tomorrow will however be coloured by August’s inflation data, which came in unchanged from July at 2.2%. The largest price pressures came from increased air fares (particularly on continental routes), along with the traditional summer recreational and transport booms.
The German ZEW economic sentiment study sprung a nasty surprise yesterday. Sentiment fell dramatically from 19.2 in August to 3.6 points in September, the lowest read since last October. “The hope for a swift improvement in the economic situation is visibly fading”, observed ZEW president Achim Wambach.
Inflation in Canada fell to 2% in August, down from 2.3% in July and below forecasts of 2.1%. That is now the lowest rate of price increases since February 2021.
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GBP: Inflation holds firm
Sterling started Wednesday on the rise after August’s inflation failed to budge from the month before. The pound could make further moves today as markets mull the complex decision the Bank of England is eyeing tomorrow.
GBP/USD: the past year
EUR: Grim reading
More grim economic data from Germany made bleak reading for the euro on Tuesday. The ZEW survey found perceptions of current conditions and the future outlook had both fallen, indicating the scale of the challenge the eurozone now faces.
GBP/EUR: the past year
USD: Over to you, Jay
You could make a real case for this being the most anticipated Fed decision of all time. For weeks, commentators have been prodding for details, and Donald Trump and Kamala Harris will be watching on ahead of the election. Powell is right to stress this is not political, but there’s no doubting the stakes for the US dollar, the economy and the presidential race.
EUR/USD: the past year
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