GBP/USD Edges Higher as Markets Price in Federal Reserve Rate Cut

The pound traded slightly higher against the dollar, with GBP/USD near 1.3555[1] in Monday’s early Asian session. Market commentators note that markets are now speculating on the policy move on Wednesday by the Federal Reserve[2] that the central bank is set to declare the first-rate cuts of the year. Such a move is believed to pressure the US dollar. The release of September's New York Empire State Manufacturing Index[3] will also be addressed later in the day. The markets are now completely anticipating a reduction of interest rates by the US Federal Reserve[4] during its meeting this Wednesday and the traders are betting nearly all their money on a reduction of one-quarter point. It is assumed that the change of sentiment follows recent indications of a weakening labour market[5], and this has lent the argument in favour of eased policy. As the CME FedWatch tool[6] shows, the prognosis of a rate cut in September is close to 100 percent, and only a few investors are even thinking of a larger rate cut.

Market reports[7] note that Fed officials, including Chair Jerome Powell, have emphasized that future decisions would rely on economic information. Market commentators suggest that markets will look at the Summary of Economic Projections (SEP)[8] as a clue to the growth forecasts and how policymakers view the direction interest rates will take. It is also expected that if the note of the Fed turns out to be more dovish (a political stance or an economic policy that favours peaceful diplomacy, discussion, and non-violent solutions over the use of force or military action.) than expected, it will weaken the US dollar[9], providing some relief to the major currency pairs and altering the near-term forecast of traders and investors.

Some analysts[10] believe that weaker UK economic data would drag on the Pound. July's GDP[11] and Factory Output also indicated a decrease, and now there is a new concern regarding the robustness of the UK economy. This has made traders believe that there is a higher risk of the Bank of England (BoE)[12] reducing the rate of interest before the year ends. Market commentators[13] estimate a probability of further reduction in the rate to about one in every three, and this could mean that Sterling including GBP to USD exchange rate, will be subjected to mild selling pressure.

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USD/JPY Steadies as Fed Rate Cut Hopes Influence Market Sentiment

The USD/JPY pair stayed steady to trade around 147.60[14] in Monday's early Asian session. Market commentators[15] point out that the attention is centred on the US Federal Reserve because markets are optimistic on the first interest rate cut of the year later this week, which could pressure the US Dollar against the Japanese Yen. It is only expected that traders would also be keen on the publication of the NY Empire State Manufacturing Index[16] in September, which is expected later in the day, to provide new indications on the US economy prospects and the course of policy used by the Fed.

Market reports state that the US Initial Jobless Claims[17] rose whereas the inflation rose marginally, staying in focus of the Federal Reserve before its September meeting on Wednesday. Some analysts[18] believe that the markets have already assumed a rate reduction this week and have already changed their forecasts to three overall in 2025, as compared to only two expected in the same direction two weeks ago. Fed Chair Jerome Powell[19] and other policy makers have indicated the change in policy to a stronger policy, despite the presence of tariff-related inflation risks. A dovish tone[20] (a political stance or an economic policy that favours peaceful diplomacy, discussion, and non-violent solutions over the use of force or military action.) is believed to have a short-run weight on the US Dollar.

John Velis[21], the BNY macro strategist of the Americas of New York, indicates that the dollar has a bad prognosis on several fronts. He stated that the interest rates reduction initiative by the Federal Reserve is putting a strain on the currency. Moreover, foreign investors are still hedging by buying U. S. assets and selling the dollar. Velis has indicated that such continued behaviour is likely to continue imposing a downward pressure on the dollar in the next few months.

Market reports[22] point out that the current Prime Minister of Japan, Shigeru Ishiba, has resigned due to the pressure of the defeat in the elections in the previous year and the divisions within his ruling party. The political uncertainty that is expected to be left behind after his exit will hopefully serve as an incentive to the Bank of Japan (BoJ)[23] to wait longer before it can increase its interest rate, especially when the new leader is apprehensive of the high costs of borrowing. Some analysts[24] believe that such a positioning can further push down the yen, which can undermine it and favour a positive trend of the currency pair in the short-term.

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NZD/USD Weakness Nears China Data Amid Fed Rate Cuts

The NZD/USD pair continued its decline for a second straight session on Monday and traded near 0.5950[25] in Monday's early session. It is assumed that the New Zealand Dollar was under pressure as the latest BusinessNZ Performance of Services Index[26] showed a market rate of 47.5 in August, which was lower than that of 48.9 in July. Market reports note that the index is currently below its long-term average of 52.9, which is 18 months in the current state, indicating that the services segment is still weak and putting a strain on the mood of the Kiwi currency.

Market commentators point out that traders are walking on the fence before the latest economic data of China, with the Retail Sales[27] and Industrial Production numbers coming later in the day. Retail Sales are expected to increase by 3.8% annually in August, marginally higher than the growth of 3.7% in the only month before, and Industrial Production[28] is projected to increase by 5.8%, compared with an increase of 5.7% in the previous month. It is expected that since China[29] is the largest trading partner of New Zealand, the resultant effect may have a toll on the New Zealand dollar. In the meantime, the economic consultations between the US Treasury Secretary, Scott Bessent[30], Trade Representative Jamieson Greer and the Vice Premier of China, He Lifeng are still going on in Madrid, and the markets are closely observing their negotiations regarding trade and future cooperation.

Market commentators[31] believe that the New Zealand dollar will have a chance to support as the US dollar will be under pressure due to the indications of a weak labour market. The Federal Reserve[32] is anticipated to announce its initial rate reduction of 2015 this Thursday, which ought to reduce interest rates by 25 basis points, yet a 50-point decrease is feasible. Some analysts[33] also note that additional easing is also being priced in up to 2026 as the policymakers are seeking to insure the US economy against a possible recession and dampen recession fears.

Market reports[34] point out that both Morgan Stanley and Deutsche Bank have now predicted that the Federal Reserve will reduce the interest rates three times this year, due to the declining inflation. Both banks are believed to reduce by 25-basis points at the remaining of the Fed meeting in September, October, and December. Market reports[35] also note that the forecasts, published Friday, indicate a change towards a less restrictive monetary policy, according to the commentators of the market.

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USD/CAD Slips as Fed Rate Cut Prospects Weigh on Markets

The USD/CAD pair traded slightly lower around 1.3840[36] in Monday's early Asian session, after modest gains in the prior session. The pair are believed to be under strain because the US Dollar is weakening under the burden of a weakening labour market[37]. Market commentators note that this has raised the prospects that the Federal Reserve[38] could give its first interest rate cut of the year in the announcement of its policy decision on Thursday.

The market commentators[39] observe that traders have high expectations that the US Federal Reserve may reduce interest rates by 25 basis points during its September meeting, and little possibility that the interest rates will decrease by 50 basis points. Further easing into the year 2026[40] is also being priced in by the markets to sustain growth and keep the markets out of the recession. Market reports[41] point out that both Morgan Stanley and Deutsche Bank are anticipating three Fed rate cuts in 2008, which is supported by lower data on inflation. Recent reports[42] show that they anticipate a decrease of 25 basis points at all the other meetings in September, October and December.

Market reports[43] point out that traders are awaiting to know whether Stephen Miran will take over as a Federal Reserve governor before the next policy meeting. It has also been reported that, according to the Senate agenda laid down by the Republican leaders, he might get a full Senate floor vote on his confirmation on Monday evening. The markets[44] believe that his time of confirmation may affect the market sentiments because investors are mindful of his potential involvement in influencing future monetary policy decisions.

Market reports[45] state that the Consumer Price Index of Canada is scheduled on Tuesday, just before the policy decision of the Bank of Canada on Wednesday. Market commentators[46] point out that the markets are closely monitoring the anticipation of a reduction in the interest rates that was increased after the jobs report in August revealed that some 65,500 positions had been lost. It is reported that the unemployment rate also increased to 7.1[47], which strained the central bank to relax policy amidst the declining labour markets and less favourable demand indicators in the entire Canadian economy.

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