Dollar firms ahead of Fed rate decision

Important calendar events

• GBP: BRC Shop Price Index, BOE Quarterly Bulletin
• JPY: Unemployment Rate, BOJ Core CPI
• EUR: French Consumer Spending, French Flash GDP, German Import Prices, German Retail Sales, German Preliminary CPI, Spanish Flash CPI, Spanish Flash GDP, Italian and German Preliminary GDP, EU Preliminary Flash GDP 
• USD: S&P/CS Composite-20 HPI, HPI, CB Consumer Confidence, JOLTS Job Openings

USD

The dollar edged higher on Monday, and the dollar index rose to the 104.6 level. US treasury yields declined, with the US 10-year bond yield dropping to 4.18%. 

One of the key factors that are driving the dollar right now is the US rate outlook. The US Federal Reserve kept interest rates unchanged at its policy meeting in June, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. 

Markets this week will focus mainly on the Fed policy meeting on Wednesday. The Fed is expected to keep interest rates steady this week but will likely signal a rate cut in September. Markets are already pricing in a rate cut in September with almost 90% probability. 

Traders will scrutinize Fed Chair Jerome Powell’s press conference after the meeting. If Powell’s speech is more hawkish than expected, rate cut expectations might drop, boosting the dollar.

US inflation has dropped to its lowest level in three years, raising the odds of a rate cut in September. Headline inflation cooled to 3.0% year-on-year in June from 3.3% in May against expectations of 3.1%. Monthly inflation shrank by 0.1% in June against the 0.1% growth expected. Core inflation, which excludes food and energy, rose by just 0.1% in June from 0.2% in May dropping below expectations of 0.1% growth. Signs that inflationary pressures are easing might induce the Fed to start cutting interest rates in September.

GDP data showed that the US economy expanded by 2.8% in Q2 of 2024, surpassing expectations of 2.0% growth. US economic growth in Q1, however, was revised downward, showing that the economy expanded by just 1.4% in the first quarter of the year. 

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EUR 

EUR/USD dipped from 1.085 to 1.082 on Monday. If the EUR/USD pair declines, it may find support at 1.080, while resistance may be encountered near 1.090.

The ECB kept interest rates steady at its monetary policy meeting in July, after lowering its Main Refinancing Rate by 25 basis points to 4.25% in June. ECB President Christine Lagarde has stated that the central bank’s policy will remain data-driven. Markets expect that the ECB will cut interest rates again in September. The central bank’s policy outlook, however, will likely depend on the progress of disinflation in the EU over the coming months. Eurozone inflation remains sticky and may slow down the pace of future rate cuts.

Eurozone inflation eased to 2.5% in June from 2.6% in May putting pressure on the Euro. Core CPI, which excludes food and energy, however, rose by 2.9% on an annual basis in June against expectations of a 2.8% print. 

The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.

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GBP

GBP/USD dipped to the 1.281 level in early trading on Monday, then pared some of the day’s losses, rising to 1.286. If the GBP/USD rate goes up, it may encounter resistance near 1.294, while support may be found near 1.277. 

The BOE kept interest rates steady at its latest monetary policy meeting in June. The BOE maintained its official rate at a 16-year high of 5.25. The BOE is meeting this week on Thursday, and the odds of a rate cut in July are up to approximately 60%, while a rate cut by September is fully priced in. BOE rate cut odds within the year are on the rise and many analysts are predicting two rate cuts in 2024. 

The British economy is showing signs of improvement, reducing the odds of a dovish pivot by the BOE. GDP data showed that the British economy expanded by 0.4% in May following stagnation the month before and against expectations of 0.2% growth. Moreover, the British economy expanded by 0.7% in the first quarter of the year against initial estimates of 0.6% growth. The UK slipped into recession last year as the economy contracted by 0.3% in the final quarter of 2023. 

Price pressures in the UK are easing, raising the odds of a BOE rate cut by September. British headline inflation remained steady at 2.0% year-on-year in June, beating slightly expectations of a drop to 1.9%. Annual Core CPI, which excludes food and energy, also remained steady at 3.5% in June. British inflation has consistently been down to the BOE’s target 2% target since May, indicating that the BOE’s hawkish monetary policy has been paying off. 

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JPY

USD/JPY traded sideways on Monday, oscillating around the 153.8 level. If the USD/JPY pair declines, it may find support near 151.7. If the pair climbs, it may find resistance near 157.9.

The Yen has been under pressure since the BOJ disappointed expectations of a hawkish shift at its latest meeting. The BOJ pivoted to a more hawkish policy at its meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks. 

BOJ Governor Kazuo Ueda has hinted that the central bank will ease its bond purchasing at the next policy meeting on Wednesday. While rate cut expectations in July remain close to 30%, markets anticipate that the BOJ will ease its bond purchasing program this week, gradually shifting to a more hawkish policy.

The Yen surged in July, raising intervention speculation. The USD/JPY had been trading close to a 38-year high when the Yen received a sudden boost, fueling reports that the Japanese government has once again intervened to support the currency. So far Japanese officials have not commented on those rumors, but many analysts believe that the sudden reprieve in the Yen’s downfall was engineered by the BOJ. Analysts estimate that the BOJ has spent approximately $38.4 billion this month to prop up the Yen.

BOJ officials had been attempting to boost the Yen, warning traders against speculative short selling of the currency. The BOJ intervened to support the Yen in 2022 and again this year in late April and early May, when USD/JPY surged above the 160.0 level. The recent sudden boost in the Yen was likely due to another round of Yen buying by the Japanese government and has served to drive the message home that the government will step in to support the currency when necessary. Fears of another intervention have been preventing speculative short-selling of the Yen in the past few days, boosting the currency. 

On the data front, inflation in Japan remains weak but rising. Headline inflation rose to 2.5% year-on-year in May from 2.2% in April. BOJ Core CPI rose to 2.1% on an annual basis in May from 1.8% in April, exceeding expectations of 1.9%. Rising inflation in Japan increases the odds of another BOJ rate hike later in the year. Tokyo Core CPI rose to 2.1% year-on-year in June from 1.9% in May against estimates of a 2.0% reading. 

Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.

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Written by:
Myrsini Giannouli

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