Dollar lower amid Fed rate cut talk

The dollar remains under pressure amid indications the Fed is preparing to resume lowering interest rates. EURUSD has broken decisively through last Friday’s post-US jobs report high of just under $1.16 to trade at around $1.1680 this morning, though this is still below its best levels for the year so far of around $1.1840 back in early July. Sterling has also broken through its post-jobs data high (of just over $1.33), trading at about $1.3370, but it has dipped to around £0.8735 versus the euro, not far off its year-to-date low of circa £0.8770 in late July. The Bank of England looks set to announce a 25bps cut in interest rates to 4% at noon today – which would bring the cumulative reduction over the past year to 125bps – with the market pricing in a further quarter-point cut by the end of the year.

Government bond yields were not much changed once again. Curve steepening was the order of the day, with 2-yields flat (Germany and UK) to slightly lower (US) and 10-year yields a couple of bps higher. In equity markets, the Nasdaq again led another decent rise in US stocks, adding around 1.2%, while European stocks lagged, chalking up modest gains of about 0.3%.

Comments from a number of Fed officials indicate the central bank is preparing to lower interest rates, variously stating that the recent slowdown in jobs growth is “concerning” and may mark a “turning point” for the economy; the softening of the labour market means “we will need to adjust (monetary) policy in the coming months”; and “the economy is slowing” (hence) in the near term it may become appropriate to start adjusting” interest rates. The market currently sees about a 70% chance of a 25bps rate cut at the Fed’s next meeting in September.

For the day ahead, the focus is on the Bank of England’s (BoE) latest interest rate announcement. It looks set to cut rates by 25bps to 4%, bringing the cumulative reduction over the past year to 125bps and maintaining the pattern of easing policy every three months at the time of its updated growth and inflation forecasts. The latest projections are unlikely to differ too much from those in May, with growth expected to remain relatively sluggish, unemployment to nudge up further, and inflation to remain around current levels (circa 3.5%) for most of the remainder of this year before starting to fall back towards the 2% target during the course of 2026 and into 2027.  The BoE is likely to reiterate that a “gradual and careful approach” to lowering rates “remains appropriate”, which will still leave scope for another cut before the end of the year.