Home Daily Commentaries US Dollar gains as Federal Reserve reduces expectations for steep interest rate cuts

US Dollar gains as Federal Reserve reduces expectations for steep interest rate cuts

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Tuesday 1 October, 2024

Daily Currency Update

In Europe, the latest Consumer Price Inflation (CPI) data released yesterday showed a further deceleration in prices across six German states. This significant drop has heightened market expectations for a rate cut when the European Central Bank (ECB) meets later this month. Currently, there is a 75% chance of a 25 basis point cut, a substantial increase from just a week ago when markets were pricing in only a 25% chance. Consequently, the Euro may weaken this week due to expectations of a quicker reduction in rates.

Markets believe the Bank of England will cut rates more slowly than other central banks. The Monetary Policy Committee (MPC) has expressed concerns about persistently high inflation in certain areas of the economy. Additionally, the new Labour Party has been raising alarms about the dire state of Britain’s finances, which will be addressed in the upcoming budget on October 30th. Meanwhile, UK GDP figures showed growth of 0.6% in the second quarter of this year, compared to a 0.7% increase in Q1.

The Federal Reserve began its rate-cutting cycle with a 50 basis point reduction on September 18th. However, employment will remain a key focus for markets in determining how quickly the Fed will need to adjust monetary policy in the coming months. Fed Chair Jerome Powell remains optimistic, noting that inflation is cooling and the economy appears resilient, despite interest rates being at their highest level in over a decade.

Key Movers

ECB President Christine Lagarde stated on Monday that the council expects the economic recovery in the eurozone to strengthen over time. She noted, “Looking ahead, the suppressed level of some survey indicators suggests the recovery is facing some headwinds, although the labour market remains resilient.” Ms. Lagarde also mentioned that the council expects inflation to rise through Q4 of this year before normalising to 2% in Q1 2025.

In the UK, market participants suggest that the Pound could retrace from recent highs as economic data points toward the Bank of England cutting rates faster than expected. Its strength has partly relied on the ‘no news is good news’ narrative. Additionally, positive data on household finances and business investment have bolstered the Pound.

Federal Reserve Chair Jerome Powell said on Monday that the Central Bank remains poised to reduce borrowing costs if economic data supports it. He added that the Fed has made progress toward price stability without a painful rise in unemployment. However, he also mentioned that risks are skewed on both sides, and although inflation appears to be moderating toward their 2% target, all interest rate decisions will be made on a meeting-by-meeting basis. Following his comments, the US Dollar firmed as expectations for another 50 basis point cut at the Fed’s October meeting were pared back.

Expected Ranges

  • GBP/USD: 1.3355 - 1.3405 ▼
  • GBP/EUR: 1.1980 - 1.2030 ▼
  • GBP/AUD: 1.9295 - 1.9335 ▼
  • EUR/USD: 1.1120 - 1.1165 ▼

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.