Dollar falls further ahead of expected Fed rate cut

The euro broke to new 2025 highs against the dollar yesterday ahead of the Fed’s expected interest rate cut later today, trading up to almost $1.1880 before easing back to around $1.1840. Sterling also rose against the US currency, although still remaining well off its best levels of the year so far (of just shy of $1.38), reaching about $1.3670 before edging down to about $1.3630. This leaves EURGBP a little firmer, trading at around £0.8685 this morning. A 25bps cut from the Fed looks assured, but whether its “guidance” on further reductions validates current market expectations – another 125bps or so by the end of 2026 including the best part of 50bps by the end of this year – remains to be seen. This though will probably determine whether the dollar weakens further in the near-term, or instead regains some ground.

There was limited price action in government bond markets ahead of the Fed’s rate announcement. US bonds outperformed with yields 2-4bps lower across the curve, while German and UK yields were broadly flat. In equity markets, European stocks gave up their previous day’s gains, shedding more than 1%, while the S&P 500 retreated from Monday’s all-time highs, ending marginally lower on the day.

UK inflation data released a short while ago were in line with the consensus forecast. Headline inflation was unchanged at 3.8% in August, while core inflation – which excludes energy and food prices – dipped to 3.6% from 3.8% in July. The latter was due to a decline in core services inflation to 4.7% from 5%, helped by a fall in air fares last month (in contrast to a sharp rise in August last year), while core goods inflation remained at 1.6%. The Bank of England expects headline inflation to top out at 4% with the September reading, before starting to fall back gradually into year-end.

Retail sales in the US were stronger than expected in August, rising by 0.6% in value terms from July. Much of this seems to be due to higher prices though, with the latest CPI data showing goods prices rose by 0.5% last month (in turn reflecting the impact of higher tariffs). Separately, output in the manufacturing sector also came in ahead of expectations last month, rising by 0.2% month-on-month, but the July outturn was revised down to show a fall of 0.1%.

There’s not much in the way of economic data ahead of the Fed’s rate announcement at 7pm (Irish time). A final reading of August inflation is due in the Euro area (expected to be unchanged from the flash reading of 2.1%), while housing starts and building permits are scheduled in the US.