Dollar loses more ground

The euro and sterling continue to advance against the dollar, which is being weighed down by the prospect of the Fed beginning to cut interest rates next month. The single currency is trading at around $1.1080 this morning and so is closing in on its previous high of just under $1.1150 back in late December last year, while the pound is trading just shy of $1.30, not far off mid-July’s high of around $1.3040. This leaves EURGBP little changed from yesterday morning at around £0.8530. It is a quiet day ahead again in terms of economic data, so the path of least resistance for the dollar may remain downwards.

The prospect of lower interest rates is helping equity markets, which had another positive session yesterday. The S&P 500 added almost 1%, leaving it just 1% off its all-time high in the middle of last month, while European stocks gained around 0.5%.  It was quiet enough in bond markets, with yields flat to marginally lower on the day.

The Conference Board’s Leading Economic Index  – which provides “an early indication of significant turning points in the business cycle” in the US – fell in July after declining in June as well. According to the Conference Board, it is not indicating recession ahead but does point to a marked slowing of GDP growth to annualised rates of around 0.6% and 1% in Q3 and Q4 respectively, well down from the Q2 outturn of 2.8%.

Fed member Kashkari has said “the debate about potentially cutting (interest) rates in September is an appropriate one to have”, given what he described as “concerning signs” in the labour market, which has been cooling in recent months.  Kashkari had previously doubted there would be need to cut rates at all in 2024.

Looking to the day ahead, economic data is very thin on the ground. Construction output is due in the Euro area, as is a final reading of CPI inflation in July – the flash reading showed the headline rate ticked up to 2.6% from 2.5% in June (with the core rate remaining at 2.9%).