The U.S. Dollar Index edged higher after experiencing its most significant drop in nine months on Friday, while the 10-year Treasury yield remained steady.
Overview
The market’s cautious stance is further influenced by escalating Middle East tensions, prompting some safe-haven buying. The upcoming Nvidia Corp. earnings report is also in focus, potentially impacting investor sentiment regarding the artificial intelligence sector. Meanwhile, the European Central Bank has signaled another likely interest rate cut in September, following its initial reduction in June. These developments are crucial for Buck as they could either reinforce or undermine its recent performance in the currency markets.
U.S. futures have shown uncertainty as investors weigh the implications of the Federal Reserve’s policy easing after Chair Jerome Powell’s dovish remarks at the Jackson Hole Symposium on Friday. The anticipation of an interest rate cut next month is almost certain, but the debate now centers on the magnitude of the cut and its implications for the economy’s health. Traders have increased their bets on a half-point rate cut in September, but such a significant reduction could signal a potential hard landing for the economy, dampening the demand for stocks.
This sentiment is reflected in the recent data released this morning, showing a decline in orders for durable and capital goods, excluding transport equipment, which fell more than expected in July. There will be other data items to chew in the next few days, but none will be more important than the Gross Domestic Product growth reading for Q2 out on Thursday.
What to Watch Today…
- U.S. GDP Thursday
- U.S. Personal Income, spending, PCE price on Friday
- Monex USA Online is always open.
MXN ⇓
The Mexican Peso declined as traders gravitated towards haven currencies amidst heightened tensions in the Middle East. Despite a strong rally on Friday, prompted by Federal Reserve Chairman Jerome Powell’s comments signaling interest rate cuts in the U.S., the Peso has fallen by 0.5%. The currency’s roller-coaster ride throughout August has strengthened its support area, but it remains in a depreciation trend due to its distance from the main moving averages. Additionally, the local market liquidity remains thin, with 51 basis points in rate cuts priced in for the next three months, bolstered by Powell’s dovish tone. The Peso’s performance is further impacted by the stronger Japanese Yen, which has brought concerns of a carry-trade to unwind, affecting currencies popular for carrying, like the Peso and the South African Rand. The Peso’s movements this week will be influenced by the ongoing debate over the size of the Fed’s rate cut and the evolving geopolitical landscape. There will be an inflation report from Banxico on Wednesday, and not much else in terms of indicators until the start of September.
EUR ⇓
The Euro has dropped in value this morning after having seen a significant rally this month, appreciating about 3.3% against the dollar, marking its best performance in over a year and a half. This surge is attributed to the European Central Bank’s more resilient interest rates compared to those in the U.S., despite the Federal Reserve’s dovish stance on policy loosening. The ECB’s chief economist, Philip Lane, emphasized the need for the benchmark rate to remain in restrictive territory to guide the disinflation process back to target. This stance suggests that the ECB may not be as aggressive in policy easing as the Fed, which has been pricing in three full rate reductions. The Euro’s rally is a reflection of this reality, and while it may not sustain the same degree of gain next month, the currency is expected to remain supported as long as the Euro-area economy performs well.
In France, the political landscape is shifting as President Emmanuel Macron engages in talks to form a government and end the deadlock following a fragmented parliament. The main opposition groups favor increased fiscal spending, which poses a challenge to France’s compliance with EU fiscal rules and debt sustainability. This political uncertainty has led to a rise in French borrowing costs, which could weigh on growth in the coming quarters. Despite a temporary economic boost from the Olympics, France could face rough quarters ahead. The French economy’s performance will be a key factor in the Euro’s strength, as political and fiscal stability are crucial for investor confidence on the horizon.
