The U.S. dollar (USD) fell in the early North American session on Friday after recovering from a 10-day low on Thursday. The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, is struggling to maintain the recovery seen on Thursday and falls to nearly 102.75.
The asset faced selling pressure as investors remain confident that the Federal Reserve (Federal) will start cutting interest rates from the September meeting. However, market expectations for the Fed to start the policy easing cycle with an aggressive approach have diminished significantly. Earlier, market participants began expecting a 50 basis point rate cut from the Fed in September amid fears that the US could enter a recession.
The pricing data for 30-day federal funds futures shows that the probability of a 50 basis point rate cut has dropped to 29.5% from 51% recorded a week ago. Strong speculation of a rate cut by the Fed in September also weighed on bond yields. 10-year US Treasury yields fell to nearly 3.91% .
Meanwhile, Fed policymakers have also acknowledged that a rate cut has become appropriate as risks have now expanded to the labor market as well. This week, Atlanta Federal Reserve President Rafael Busic said in an interview with the Financial Times (FT) that he was open to cutting interest rates in September. When asked about the size of the rate cut, Bosic said he was comfortable for half a percentage point if the labor market deteriorated further .
EUR Rises, Dollar Under Pressure on Expectations of Rate Cuts
The euro rose slightly on Friday. In the European session, the EURUSD pair is trading at 1.0994, up 0.21% on the day at the time of writing.
The U.S. dollar is under pressure and the euro has risen about 1.2% this week before losing about half of those gains. On Wednesday, the euro hit 1.1047, its highest level against the U.S. dollar this year.
Investors are showing greater pessimism about economic conditions. Eurozone investor sentiment fell to 17.9 in August, down sharply from 43.7 in the previous month. This was the lowest reading since November 2023. Germany, the eurozone’s largest economy, showed a similar trend. There are significant doubts about the Eurozone and the German economy and these concerns have been heightened by the recent turmoil in global stock markets.
Strong US data eases market tension
Exactly two weeks ago, the US jobs report was weaker than expected, leading to a collapse in global stock markets. Investors panicked that the U.S. economy is heading for recession but markets recovered thanks to strong U.S. figures this week.
U.S. inflation fell to 2.9% year-on-year in July, down slightly from the previous month’s 3% which was also market estimate. Retail sales jumped 1% month-on-month, recovering from -0.2% in June and exceeding the market estimate of 0.4%. Jobless claims were also below market estimates for the second week in a row.
The collapse in financial markets raised expectations of a half-point rate cut by the Fed to 60%, but this has fallen to 30% since the retail sales report (quarter-point priced at 70%). The Fed meets again on September 18 and a rate cut is almost guaranteed but the size of the cut remains an open question.
U.S. Dollar Regains Some Gains as Market Moves
There were no major catalysts in the session, but the dollar regains a good part of its gains after US retail sales data yesterday.
The USD/JPY pair fell particularly by more than 120 basis points to approach 148.00, as bond yields fell. The 10-year Treasury yields fell by about 6 basis points to 3.867%, making the yen more in demand during the session..
In the past three days, traders have been able to look at US data to get some sense of calm in the economic calendar. But today, they have to look to themselves to lift things up now. S&P 500 futures rose 0.2% early, but are now down 0.2% as we look forward to North American trading..
Back in the major currencies, the EUR/USD pair rose 0.2% to just under 1.1000 as the big options that keep things there expired. GBP/USD rose 0.4% to 1.2905 while USD/CHF fell 0.6% to 0.8675 currently..
The Canadian dollar is struggling and may be weighed down by weak intraday oil prices. WTI crude fell about 3% as rejection continued from $80 an ounce this week..
In other commodities, gold is again approaching the key resistance zone at $2475-80 an ounce as buyers prepare to break through it ahead of the weekend..
The Australian dollar rose slightly during the early hours of Friday morning as it looks like we’re trying to reach a common resistance barrier before. The level of 0.6650 is an area that has been very important more than once. So, it’s not surprising to see that we’re struggling there.
