The US dollar saw a notable recovery in early European trading on Thursday, regaining some ground after heavy losses in the previous session. The rise came after the US Federal Reserve opened the door to a possible interest rate cut in September. In contrast, the British pound recorded a decline ahead of the Bank of England’s latest monetary policy review meeting.
At 14:25 Riyadh time, the dollar index, which measures the performance of the greenback against a basket of six major currencies, rose by 0.27% to reach 104.142. This rise comes after a 0.4% decline in the session on Wednesday. Despite the recovery, the dollar index still suffered an overall decline of 1.7% during July, making it its weakest monthly performance this year.
Fed keeps interest rates steady, signals possible cut soon: At the conclusion of its two-day monetary policy review meeting on Wednesday, the Federal Reserve decided to keep interest rates at their current levels, as was widely expected. However, the bank indicated that monetary policy could be eased soon, which has sparked interest in financial markets.
Federal Reserve Chairman Jerome Powell explained that inflation remains “somewhat” above target, but upside risks have receded, while downside risks in the labor market have increased. In this context, a note from economists at Goldman Sachs stated that Powell’s comments “suggest that the bar is not too high” for a September rate cut. This approach by the Fed could open the door to possible rate cuts at the next meeting, which could affect the movements of financial markets and the economy in general.
Economic forecast: Upcoming inflation data could influence the rate cut decision
Goldman Sachs economists added that the July inflation data, expected to be released on August 14, could be favorable. Expectations indicate an increase of 21 basis points in the core CPI and 19 basis points in the core PCE index. According to expectations, this data is likely to contribute to the decision to cut interest rates in September. Meanwhile, a slew of economic data is due on Thursday, including weekly jobless claims, June construction spending data, and July manufacturing data from the Institute for Supply Management. However, the main focus remains on Friday’s closely watched monthly jobs report, which is seen as an important indicator of the upcoming monetary policy decision.
The report is expected to show that the US economy created 177,000 jobs in July, down from 206,000 in the previous month. The unemployment rate, which has risen in each of the past three months, is expected to hold steady at 4.1%.
GBP Falls Ahead of BoE Meeting
The pound fell significantly ahead of the Bank of England meeting later in the session. In Europe, GBP/USD fell 0.7% to 1.2767.
The pound is seen falling sharply amid uncertainty surrounding the BoE decision. Key central bank officials have not spoken publicly for more than two months, with the UK general election due in July looming. This uncertainty adds to the current market volatility and is weighing on the pound.
Inflation data points to a possible rate cut at the Bank of England meeting
UK consumer price inflation data returned to the Bank of England’s 2% target in May, and remained at that level in June. This stability in inflation rates increases the likelihood that the Bank of England will decide to cut interest rates at its meeting scheduled for Thursday.
In June, the Bank of England’s Monetary Policy Committee voted almost unanimously to keep interest rates unchanged by a margin of 7-2. However, the minutes of the meeting recorded that many members who voted to keep rates were close to voting to cut them, highlighting the growing interest in a rate cut in the near future.
On the other hand, the EUR/USD pair fell by 0.4% to 1.0783. This decline came after data showed that manufacturing activity in the euro zone remained mired in contraction in July, suggesting that the European Central Bank may have to cut interest rates again this year to boost the slowing economy.
The final HCOB Eurozone Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, came in at 45.8 in July, ahead of the preliminary estimate of 45.6.
Yen Rises in July: Market Analysis and Developments
In Asia, the JPY/USD index edged down 0.2% to 149.66. This follows a notable rise in the yen, which was supported by the Bank of Japan’s decision to raise interest rates to levels not seen in 15 years, as well as expectations of a rate cut by the US Federal Reserve as inflation in the US eases.
The yen rose 7% in July, making it its strongest monthly performance since November 2022. The month started strongly after the yen was rooted near 38-year lows. Much of the rally was driven by repeated interventions by Japanese authorities, totaling $36.8 billion, to support the currency and stabilize markets.
CNY/USD rises
Meanwhile, the CNY/USD pair rose 0.3% to 7.2432. The rally came after Caixin PMI data showed an unexpected contraction in China’s manufacturing sector, following weak government PMI data earlier in the week.
These readings have raised concerns of a broader slowdown in China’s largest economy, adding to concerns about the Chinese economy. They have also prompted calls from Beijing for additional stimulus measures to support the economy and address the current economic challenges.