The United States Dollar lost fairly substantial ground during yesterday’s trading session and opened weaker across the board yesterday as investors are still guessing on the size of a potential interest rate cut from the Federal Reserve next week.
Overview
The Bloomberg Dollar Spot Index fell 0.4%, and yields on 2-year treasury notes dropped by six basis points after comments from former Fed official William Dudley coincided with the publication of a report from the Wall Street Journal to, once again, swing the odds of 25 basis points versus fifty of easing back to essentially a coin flip. The report from WSJ simply stated that Fed policymakers are considering whether to cut by 25 or fifty points, but any such acknowledgment that a ‘jumbo cut’ is, in fact, on the table will drive a repricing in swaps markets and, in turn, run the Dollar weaker.
Former New York Fed President William Dudley, who is still seen to be considerably influential, also spoke yesterday and emphasized that there is ‘scope’ for a half-point interest rate cut next week, spurring rate traders to pile onto larger easing bets. As recently as Wednesday morning, markets had largely written off such a chance, pricing odds of a larger move at just 17%. At the time of writing now, odds have jumped back up to 46%. It’s clear that the Fed will make some move next week, yes, but this meeting is effectively back in ‘live’ status and promises substantial volatility around next week’s announcement and subsequent press conference from Chair Jerome Powell. Traders will receive a report on retail sales for the month of August next Tuesday morning as well, which has the potential to swing USD in either direction.
In other markets, Chinese equities continue their slump as Shanghai’s CSI 300 index hit its lowest point since January 2019. Gold, too, reached a new record high in overnight price action as traders prepare for a global reassessment of high interest rates and look for more stable returns as the Fed is set to enter an easing cycle next week.
What to Watch Today…
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EUR ⇑
The single currency, though still off its strong point for the month that EURUSD saw last week, is trading in positive territory for the second session in a row after yesterday morning’s European Central Bank decision had time to filter through markets. Though the ECB did cut interest rates by 25 basis points, traders eventually saw such an action as a ‘hawkish cut’ after ECB President Christine Lagarde signaled that a subsequent cut at the central bank’s October meeting is not likely and markets should expect more action in December. ECB Governing Council member Martins Kazaks said that further easing next month would have to come as the result of some economic slump.
JPY ⇑
Japanese Yen is the big winner on the G10 board for the week, gaining more than a percent of ground against USD in the last 5 trading sessions. USDJPY is now sniffing its strongest rate this calendar year after fresh bets on easing from the Federal Reserve jolted the pair into action yesterday. Options traders, for their part, have begun to add more bullish wagers on the Yen, raising market expectations that JPY could continue its rally into the fourth quarter of this year. The Bank of Japan also has a policy decision next week, and while not expected to make any changes to its interest rate this time around, the door remains open for further tightening this year.
