Dollar plummets after Powell signals September rate cut

Important calendar events

• JPY: Final Manufacturing PMI 
• EUR: Spanish, Italian, French and German Manufacturing PMI, EU Manufacturing PMI, Unemployment Rate, 
• GBP: Final Manufacturing PMI, BOE Monetary Policy Report, Monetary Policy Summary, MPC Official Bank Rate Votes, Official Bank Rate, BOE Inflation Letter
• USD: Challenger Job Cuts, Unemployment Claims, Prelim Unit Labor Costs, Final Manufacturing PMI, ISM Manufacturing PMI, ISM Manufacturing Prices

USD

The dollar plummeted after the Fed policy meeting on Wednesday and the dollar index dropped below the 104.1 level. US treasury yields declined, putting pressure on the dollar, with the US 10-year bond yield dropping to 4.07%. 

The Federal Reserve kept interest rates steady on Wednesday but signaled a rate cut in September. The US Federal Reserve kept interest rates unchanged at its policy meeting in July, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. The FOMC statement released after the meeting had a dovish bias, putting pressure on the dollar.

Fed Chair Jerome Powell’s press conference after the meeting had dovish undertones, driving the dollar down. Powell stated that the central bank aimed to keep interest rates steady in July and to discuss the possibility of a rate cut at a future meeting. Powell also stated that inflationary pressures in the US are still elevated. He stressed, however, that Q2 inflation readings are adding to the Fed’s confidence that inflation is cooling and that the overall state of the US economy is moving closer to a point where it would be appropriate to reduce interest rates. 

Markets interpreted Powell’s comments to mean that the central bank is planning to start cutting interest rates in September. Currently, a 25-basis points rate cut in September is fully priced in. Moreover, after Powell’s speech, market odds of a second rate cut within the year have gone up. 

On the data front, economic activity data released Tuesday for the US were optimistic, providing support for the dollar. CB Consumer Confidence, a leading indicator of consumer spending, rose to 100.3 in July, surpassing estimates of a 99.7 print, as well as June’s reading of 97.8. JOLTS Job Openings data showed that the US economy opened 8.18M new jobs in June, exceeding expectations of 8.02M new jobs. 

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 traded sideways on Wednesday, oscillating around the 1.083 level. The currency rate exhibited some volatility on Wednesday as markets awaited the conclusion of the Fed monetary policy meeting. If the EUR/USD pair declines, it may find support at 1.080, while resistance may be encountered near 1.090.

Key economic activity indicators were released on Tuesday for the EU. Preliminary Flash GDP data released on Tuesday showed that the Eurozone economy expanded by 0.3% in Q2 of 2024, exceeding estimates of 0.2% growth. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. 

German Preliminary GDP data, however, showed that the German economy contracted by 0.1% in Q2 of 2024, falling short of expectations of 0.1% growth. Germany is the Eurozone’s leading economy and a pessimistic economic outlook puts pressure on the Euro. In addition, German Preliminary CPI data released on Tuesday showed that inflation in Germany rose by 0.3% in July. This was in line with expectations but exceeded June’s print of 0.1%, indicating that the rate of disinflation is slowing down. 

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 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.

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GBP 

GBP/USD rose to the 1.286 level on Wednesday as the dollar weakened after the Fed policy meeting. At the same time, the Sterling firmed ahead of the BOE policy meeting on Thursday. 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

The Yen gained strength against the dollar on Wednesday and USD/JPY dropped below the key 150.0 level, its lowest reading since March. If the USD/JPY pair declines, it may find support near 146.3. If the pair climbs, it may find resistance near 157.9.

In a surprise move, the BOJ pivoted to a more hawkish policy at its meeting on Wednesday. BOJ policymakers voted 7-2 in favor of a rate hike, raising interest rates by 15 basis points. The BOJ had already hiked interest rates in March, ending its negative interest rate policy. The BOJ raised interest rates further on Wednesday bringing its benchmark interest rate to 0.25% from 0.10%. 

Moreover, the BOJ unveiled a plan to taper its huge bond-buying program on Wednesday, gradually shifting to a more hawkish policy. The BOJ announced that it will reduce Japanese government bond purchases by around 400 billion Yen each quarter and will reduce monthly purchases to 3 trillion Yen in the three months from January to March 2026.

BOJ Governor Kazuo Ueda’s speech after the policy meeting was more hawkish than anticipated, boosting the Yen. For the first time, Ueda expressed concern for the Yen’s weakness and revealed that it was one of the reasons for the rate hike. The BOJ Governor also mentioned in his speech the Fed rate decision later on Wednesday, expressing hopes for a dovish outcome. In addition, Ueda left the door open to further rate hikes this year, stating that the BOJ does not see the 0.50% interest rate as a barrier to raising interest rates. 

The disparity between the low BOJ interest rate and the high interest rates of other major central banks, especially the Fed’s, had driven the Yen into oversold territory. By gradually closing the gap between its interest rate and that of other major banks, Japan is hoping to boost its ailing currency and avoid the need for another intervention to support the Yen. 

BOJ officials had been attempting to boost the Yen for months, warning traders against speculative short-selling of the currency. The Japanese government finally intervened to support the Yen earlier in July, although BOJ officials have not officially admitted to an intervention. Analysts estimate that the BOJ spent approximately $38.4 billion in July to prop up the Yen. The BOJ also 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. Fears of another intervention have been preventing speculative short-selling of the Yen in the past few weeks, 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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