GBP/USD Dips Amid Inflation and Federal Reserve Focus

GBP/USD eased back and traded near 1.3640[1] in Wednesday's early session, after two consecutive days of gains. The Pound is thought to have fallen a little in relation to the US Dollar as investors await important UK inflation statistics with both Consumer Price Index and Retail Price Index[2] reports on the same presented this morning. Market reports[3] point out that another aspect that the market is focusing on is the Federal Reserve which will also declare its latest policy statement later on in the day. The outcome[4] is believed to be a lead to sentiment towards the Dollar and the broader markets in the near future.

Market analysts are of the opinion that the UK inflation will increase marginally, as the Consumer Price Index[5] is projected to record an annual inflation of 3.9% in August as compared to 3.8% in July. Prices are expected to rise by 0.3% on a monthly basis, which is higher than the 0.1% it has been increasing by. Some analysts[6] believe the fact that inflationary pressures are not decreasing as fast as they should is indicated by the slight upswing. This is thought to reinforce the anticipation that the Bank of England (BoE)[7] would maintain interest rates at 4% when it sits on Thursday.

It is anticipated that GBP/USD[8] could rebound, with the US Dollar falling due to the anticipation of multiple Fed rate cuts. Market watchers[9] point out that strong retail sales and labour data confirm the outlook, despite hotter inflation. Reports[10] observe that Morgan Stanley and Deutsche bank analysts forecast 25bps of reductions in September, October, and December meetings. In August, the US Retail Sales[11] rose by 0.6%, the same as in July with a revised figure of 0.2%, as compared to the forecast of 0.2%. The core indicators such as sales without autos and the control group increased by 0.7% as compared to 0.4% projected. Market experts point out that the statistics show that consumer spending is stable, even as there is inflationary pressure and labour market indicators are weak.

According to the CME FedWatch tool[12], market watchers noticed a 25 point drop in the Federal Reserve on Wednesday and this will be the first reduction since the month of December. It is reported[13] that focus will also shift to Fed Summary of Economic Projections (SEP) and its dot plot that indicates the direction of interest rates by various members of the Federal Open Market Committee (FOMC). It is believed that the investors will be keen on the signals regarding the GBP/USD exchange rate and extent of further cuts that can be expected.

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EUR/USD Eases Amid Fed Rate Cut and Euro Optimism

EUR/USD eased back from recent gains and traded near 1.1855[14] in Wednesday's Asian trading, after a four-day winning streak. It is estimated that the decline in momentum will not be very severe when it comes to losses considering markets anticipate the resolution of the two day policy meeting of the Federal Reserve[15]. The assumption among many economists is that the Fed[16] will reduce the interest rates by 25 basis points, a move that may continue to push the US dollar down and assist in the boosting of the euro in the coming sessions.

Market reports[17] point out that the Federal Reserve is universally likely to reduce its benchmark lending rate to 4.0% to 4.25%, the lowest point since the last quarter of 2022. In line with the FedWatch tool[18] that monitors the 30-day Fed Funds contracts, a standard 25 basis-points reduction is likely to take place, with a 96% likelihood. A higher half point[19] reduction is believed to have only a small 4% likelihood of happening. It has been reported[20] that the move has been well priced out of the markets with focus currently on the Fed outlook of growth and inflation.

Some analysts[21] stress that the markets will probably pay attention to the comments of the Fed Chair Jerome Powell after the policy meeting. Economists at ING[22] pointed out that a rate reduction by 25 bp would put Powell at liberty to be a little dovish (a monetary policy that prioritizes economic growth and employment, typically through low interest rates and increased money supply, even if it carries the risk of higher inflation.), whilst a 50 bp decrease would be heavy-handed to the extent Powell could still speak in a hawkish way. Meanwhile, in Europe, Germany’s ZEW Economic Sentiment[23] survey assailed the expectations and increased to 37.3 in September, up against 34.7 in August, up by far more than the expected 26.3, giving the euro optimism.

Market reports that ECB President, Christine Lagarde[24] will speak later on Wednesday, and any dovish remarks by the policymakers would press the Euro against the US Dollar. It is assumed that traders will also be tracking the last issue of Eurozone Harmonised Index of Consumer Prices (HICP)[25] data, the same day, so as to get further guidance on inflation and policy.

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USD/CAD Edges Higher Amid Mixed Fed and BoC Policy Signals

USD/CAD edged higher to trade near 1.3750[26] in Wednesday's Asian session, after two days of losses. The move is believed to have been the support the US dollar had in front of the policy decision by the Federal Reserve[27] later today. According to market watchers, the interest rates being reduced by 25 basis points[28] is widely anticipated by markets as the Fed delivers its first rate cut in December 2024. It is noted that there are still traders[29] who are betting on bigger 50 point cuts. According to market experts, it will also focus on the new economic projections and dot plot of the Fed[30] on the rate path.

It is assumed that USD/CAD upside potential could be low because the US dollar is under pressure due to the increasing demands of numerous Fed[31] rate reductions. Market reports[32] indicate that even with the increases in inflation, robust retail sales and labour statistics indicate the existence of robust demand. Market watchers note that the US Retail Sales increased by 0.6% in August, which represents a gain of the same level as July, and an improvement over expectations of an increase of 0.2%. Core measures also improved by 0.7 which was above the expectations. Market reports[33] point out that both Morgan Stanley and Deutsche bank predict 25 basis point decreases in September, October, and December and an implication of this is continued pressure on the Greenback in the coming months.

It is believed that the Canadian dollar was supported by new inflation figures that could indicate that the Bank of Canada (BoC)[34] will continue with tightening policy. The numbers, which revealed a consistent pressure on prices, softened the anticipation of swiftly cutting the rate and indicated economic strength. Market watchers[35] point out that investors are now inclined to view the BoC providing a fairly modest reduction of 25-basis-points of the policy, rather than a more substantial reduction, at the policy meeting on Wednesday. Reports[36] note that the statistics strengthened prudent mood and drove away the speculations of aggressive monetary easing in the near future.

Market reports[37] observe that the headline CPI of Canada increased to 1.9% in August compared to 1.7% in July and was below the expected 2.0% and below the 2% midpoint of the Bank of Canada, a fifth month in a row. Nonetheless, Trimmed mean core CPI[38] which is the core measure of interest to BoC was held near 3.0%. Some analysts[39] opine that such figures indicate that although overall price pressures were relieved, underlying inflation is tenacious following the removal of volatile elements.

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USD/JPY Remains Steady Amid Fed and BoJ Policy Uncertainty

The Japanese yen stayed steady, trading just above the 146.20[40] support level this week against the US dollar. It is believed that the pair has been steady for more than a month and the traders are wary of the mixed signals[41] in the market. Market watchers[42] observe that the investors are eagerly awaiting an announcement to be made by the US Federal reserve later in the day which is likely to reduce the interest rate by 25 basis points as the labour market statistics is expected to be softer and less inflationary. It is assumed that this has strained the US dollar[43] and contributed towards strengthening the Yen. It is anticipated that the Bank of Japan (BoJ)[44] is set to determine its policy on Friday, and markets will be on edge to find out the future strength of Yen.

Market reports[45] also indicate that the BoJ is likely to maintain interest rates at 0.5, with uncertainties that are acting on the gains of the Yen. The officials are wary because of some of the challenges like US tariffs[46] which impacts on the export-based economy of Japan and geopolitical risks are also present. The assumption is that the recent resignation of Prime Minister Shigeru Ishiba[47] brings in political uncertainty, which is likely to affect the BoJ ownership on tighter monetary policies. Market watchers[48] note that although there were positive changes to the Q2 GDP of Japan, tight labour market, and an increase in real wages, traders are still unwilling to put money on this until the announcement by the central bank. Risk appetite[49] in the equity markets undermines the Yen as a safe haven, but the steady strategy of the BoJ partially sustains the gradual recovery of the currency. Overall, it is believed that the Yen is stable but wary and is waiting to see clear policy direction.

USD/JPY[50] is said to be trading in a rectangle momentum indicating that it is uncertain before major economic events take place. Market analysts[51] point out that this tendency is created when the market is moving in a horizontal direction between two distinct markers and it means that traders are not certain. When the couple breaks lower than the support at 147.00, it may stoop lower in the support at 146.20 and even lower. On the upside, it is anticipated that the recovery efforts could face stiff resistance at the 200-day[52] moving average. Market watchers point out that the Yen is in a curious position with the balancing between safe-haven[53] demand, political uncertainties in Japan as well as different policies by the Fed and BoJ. Market commentators[54] believe that the policy decisions in this week would play a major role in determining the direction that the pair moves to next.

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