Fed to hold rates, may flag Sep cut
The main currency pairs are not much changed from this time yesterday morning ahead of the Fed’s interest rate announcement later today. EURUSD and GBPUSD are both a touch lower trading at about $1.0810 and $1.2830 respectively this morning, leaving EURGBP still hovering around £0.8425. The Fed is expected to keep rates unchanged at the conclusion of its two-day meeting but may signal a rate cut could be on the cards for September, which in turn could weigh on the dollar.
Government bond yields continued to nudge lower, despite generally firmer than expected economic data, reflecting expectations for central bank rate cuts over the coming months. Benchmark US 10-year yields were down almost 5bps to under 4.15%, bringing the decline in July to around 25bps. In equity markets, European stocks partially reversed Monday’s fall, gaining around 0.5%, while US indices were mixed with the Nasdaq (-1.2%) and S&P 500 (-0.5%) both lower but the Dow Jones (+0.5%) ending slightly higher on the day.
The Euro area economy expanded for a second consecutive quarter in Q2 – having stagnated in the final two quarters of 2023 – despite a contraction in activity in Germany, according to provisional data published yesterday. GDP in the zone rose by 0.3% on the quarter, slightly ahead of the consensus forecast of +0.2% but in line with the ECB’s June projection, and was up 0.6% on Q2 last year.
Yesterday’s US data were also slightly firmer than expected. Consumer confidence rose in July albeit still remaining relatively subdued, while the number of job openings in June came in higher than forecast albeit they were still down from May and declined by over 6% in the second quarter (versus Q1).
The Bank of Japan, which has long been an outlier among central banks, raised its key interest rate to 0.25% at its latest meeting, from a range of 0.0% to 0.1% previously, and said it would reduce the pace of its bond purchases by around half by the first quarter of 2026. The yen, which has strengthened notably against the dollar recently, has risen further to almost Y151 post the meeting.
On the economic data front today, a flash inflation reading for July is due in the Euro area, with the consensus expecting headline inflation to have remained at 2.5% but core inflation seen dipping to 2.8% from 2.9% in June, while the Employment Cost Index for Q2 and the ADP employment report for July are scheduled in the US.