September 16, 2024

“It’s a blockbuster week for FX. There are three major central bank decisions, including a hugely important Federal Reserve rate cut on Wednesday, and a raft of inflation data from the UK and Canada.”

Tim Hallinan – Trading Director

USD

The size of Wednesday’s Federal Reserve rate cut and the accompanying forward guidance are critical for the dollar’s trajectory this week, with rates traders back to pricing a 50bps cut a touch below 50%. Bets on an outsized cut had been all but wiped out by last Thursday, on the back of some slightly hotter month-on-month CPI figures for August, but they have since forcefully returned after some vocal figures endorsed the case for 50bps. At the same time, the markets remain convinced that the Fed can cut quickly enough to prevent the US labour market from weakening too sharply, and that is keeping risk sentiment buoyed. That has provided a good backdrop for the dollar to head back towards its year-to-date low from late last month. Wednesday’s decision will come with a set of dot plots too, where officials give their views on the likely evolution of the Fed Funds Rate and the US economy over the next few years. Back in June, the number of rate cuts to be delivered this year was knocked down to just one – now markets are pricing 114bps by the December meeting.

GBP

Sterling has continued to trade with some good momentum this morning, primarily on the bearish US rates story. There are two key events for the pound this week: August CPI on Wednesday morning, and the Bank of England decision on Thursday. The consensus is looking for another 2.2% headline inflation figure, but it is an expected uptick in core inflation from 3.3% to 3.5% that could likely generate the most concern. Continued stickiness in inflation is why a second BoE rate cut the day after is priced only at 28%, with policymakers likely to stay cautious while services and wage growth remain elevated. It is only expected to be a momentary pause, however, with 54bps in cuts priced by the end of the year. The CPI print is likely to be more consequential than the policy statement because, like the ECB, the BoE has tended to be intentionally quiet about where rates may go.

EUR

The euro continues to ride on renewed divergence in the rate stories for the ECB and the Fed this morning. Last week’s well-telegraphed rate cut came with little to no guidance on how quickly policymakers are likely to follow the easing path, and optionality seemingly remains the key aim of their forward signalling. The Fed is expected to deliver the equivalent of four and a half 25bp rate cuts over the next three meetings, while an October cut is priced at only 31% for the ECB. The focus for trading this week will lean more towards the US and UK, but today we get a speech from ECB Chief Economist Lane.

Markets

Holidays in the big Asian markets have thinned liquidity this morning, and futures are flat as traders look ahead to the US open later today. A renewed rise in the soft landing trade pulled equities back to the levels reached at the end of August, and the S&P 500 is trading around 0.6% off its all-time highs notched in July.

Main Economic Events (All Times CET)

8:30am: Swiss PPI Inflation
2:00pm: ECB’s Lane speaks

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