Dollar Tumbles as Rate Cut Odds Soar to New High
US Dollar Loses Ground as Markets Anticipate Further Rate Cuts
The US dollar experienced a decline in value on Thursday, driven by growing expectations of additional interest rate cuts by the Federal Reserve this year. This development was accompanied by signs that French politicians have reached an agreement, leading to a surge in the euro’s value. The Dollar Index, which measures the dollar against a basket of six other currencies, dropped 0.2% to 98.342, putting it on track for a weekly decline of 0.3%.
Growing Expectations for Additional Rate Cuts
Market participants have become increasingly convinced that the Federal Reserve will impose further monetary easing following last month’s interest rate cut, as economic data continues to paint a picture of slowing growth in the US economy. Fed Chair Jerome Powell issued a warning earlier this week about the state of the labor market, stating that "the downside risks to employment have risen." Furthermore, the Fed’s Beige Book – an anecdotal survey assessing the health of the US economy – revealed a slight decrease in economic momentum over the past eight weeks.
"Last night’s release of the Fed’s Beige Book suggests the Fed will have enough evidence to cut rates at the end of the month – even if official data releases remain suspended because of the government shutdown," analyzed experts from ING. According to LSEG data, markets are currently anticipating a quarter-point rate cut at the upcoming October 28-29 Federal Reserve meeting and another in December, followed by three more cuts next year.
Fed Reduces Borrowing Costs for the First Time Since December
The central bank had previously trimmed borrowing costs for the first time since December, reducing the federal funds target range to 4%-4.25%. Traders are focusing on numerous factors at present, including the escalating trade tensions between Washington and Beijing, as well as a meeting between Presidents Trump and Xi at the APEC summit in Korea scheduled for later this month.
"The question for financial markets is whether China’s proposed export controls on rare earths are merely part of a bargaining ploy to achieve greater concessions from the U.S. Or really whether it is a threat which would stick and greatly disrupt global supply chains, given rare earths’ role in products like semiconductors," ING added.
Euro Gains as French Politicians Agree to Pension Reform Delay
EUR/USD traded 0.1% higher at 1.1659 after the euro reached a one-week high due to an agreement among French politicians on delaying pension reforms, a key demand from the Socialist Party. "The euro and French government bonds see this as good news for the short term, although for the longer term the reversal of pension reforms merely makes the job of fiscal consolidation that much harder," ING pointed out.
However, there are doubts about the ability of EUR/USD to break above 1.1685/1730 in the near future. Nevertheless, its ability to consolidate would draw it closer to the seasonally bullish period of November and especially December.
GBP/USD Climbs Following U.K. GDP Growth Data
GBD/USD traded 0.3% higher at 1.3436 following data released earlier on Thursday indicating that Britain’s economy returned to moderate growth in August. Monthly UK gross domestic product rose by 0.1% after staying stagnant the preceding month.
Yen Continues Gains, While USD/CNY Steadies
USD/JPY traded slightly lower at 151.06 amidst speculation surrounding Japan’s fiscal policy direction. Experts in Tokyo have raised concerns about a potential shift towards more dovish monetary policies. Meanwhile, USD/CNY traded flat at 7.1253 after the People’s Bank of China issued several measures to stabilize the Chinese yuan.
Trade tensions between Washington and Beijing continued to impact markets, with US President Donald Trump hinting at imposing 100% trade tariffs against China on a prior occasion. AUD/USD fell by 0.1% to 0.6503 following weak employment data in Australia for September, showing lower growth than anticipated.
RBA Rate Cut Speculation Continues as Labor Market Weakens
Australian unemployment figures unexpectedly rose to a four-year high in the wake of weak job creation for this month, prompting predictions of an upcoming rate cut from the Reserve Bank of Australia. The revised employment data suggested a steeper decline in the labor market than initially estimated.
Interest Rate Cuts Ahead?
A number of variables such as inflation expectations and the outlook on global trade tensions will weigh heavily on central banks’ decisions as to whether they choose to lower or maintain their benchmark interest rates going forward.
Conclusion
Key factors which are influencing markets at this time include concerns over US economic growth and increasing anticipation that additional rate cuts are likely from the United States Federal Reserve, in addition to growing unease among investors due to continued uncertainty surrounding global trade.
