September 17, 2024

“The 25bps vs 50bps debate is dominating FX ahead of tomorrow’s Federal Reserve decision, and a lean towards the latter is weighing on the dollar. The rare lack of certainty going into the event sets the stage for some big market swings.”

Sam Cornford – Head of Trading

USD

Markets continue to up their bets on a 50bp rate cut at tomorrow’s Federal Reserve decision. It is now the move favoured by markets and touched a 70% implied probability this morning. A big point of discussion is how unusual it is for such a swing in market pricing to come not from the data, which had wiped out any hope for a 50bps cut only a week ago, and instead from Fed watcher commentary in the WSJ and the FT last Thursday, which put it back on the table in investors’ minds. Nevertheless, it has been enough for USD/JPY to dip below the 140 mark and touch a one-year low yesterday amid thin Asian trading volumes. Another key point to note is that, as the market prices in a 50bp rate cut, this could actually make the Fed less likely to go with 25bps. Given that monetary policy primarily transmits into the economy through the financial markets, a hawkish surprise would likely tighten financial conditions, just as the Fed is looking to support the labour market. Retail sales today is the final data input, where the focus will be on how pressing it is for the Fed to ease the pressure on the consumer. The consensus is for a 0.2% contraction on the headline figure.

CAD

Today’s CPI figure for August is set to bolster the case for accelerated easing from the Bank of Canada. The loonie traded as a US dollar proxy yesterday, slipping at least 0.5% against most of the G10 as dovish bets grew for the Fed. The consensus is looking for a 2.1% inflation figure this afternoon, alongside some further broad progress on the BoC’s suite of core inflation measures. That would put it almost right at the centre of the 1-3% tolerance band and, in a context where officials are growing increasingly concerned about the downside growth risks, would endorse the market’s expectation for at least one supersized 50bp move before the end of the year.

GBP

Sterling is closing back in on a two-and-a-half-year high against the dollar this week, driven entirely by contracting US rates ahead of tomorrow’s Fed decision. However, tomorrow’s early morning CPI report is an opportunity for some domestic-led volatility, where the market is looking for a stable 2.2% headline figure but a sharp uptick in core inflation, from 3.3% to 3.6%. The Bank of England will be most concerned about the latter and services inflation, which is expected to rise from 5.2% to 5.6%. This continued stickiness in domestic price-setting dynamics is what underpins only a modest implied chance of a rate cut at Thursday’s policy decision, although a downside surprise could see sterling cool off.

EUR

As typical following an ECB decision, there was a litany of officials’ commentary yesterday. And as typical, the messaging was highly varied. While Kazimir was firm about there being no consecutive rate cuts and there not being a ‘magic fix’ for the eurozone economy, Lane argued that rates should continue to come down gradually. Vice President de Guindos mirrored Lagarde’s language from last Thursday, reiterating the lack of a predetermined path. Today’s German ZEW survey is expected to reconfirm the dismal outlook for Europe’s largest economy with a 17.2 print, down from last month’s disappointment at 19.2.

Markets

US stocks ceded some gains in yesterday’s session even as bets were raised on a brisk start to the Fed’s cutting cycle, with some caution likely setting in ahead of tomorrow’s key Fed decision. This momentum spilled over into the Asian session this morning, with Japan’s Nikkei falling by 1%, in part due to some further yen strength and concerns about exporters. The UK’s FTSE 100 is on a four-day winning streak, having had a tough start to September.

Main Economic Events (All Times CET)

11:00am: Eurozone ZEW Economic Sentiment
2:30pm: Canadian CPI Inflation
2:30pm: US Retail Sales
3:15pm: US Industrial Production
4:00pm: Fed’s Logan speaks

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