U.S. Dollar remained firm as UK CPI inflation eases to 6.7%

Reuters: The dollar remained firm against a basket of peers on Wednesday ahead of a much-anticipated rate decision by the Federal Reserve later in the day, while the yen continued to hang close to a 10-month low.

U.S. DOLLAR REMAINED FIRM

The U.S. dollar index , which measures the greenback against a basket of rivals, stayed mostly flat at 105.17 as traders awaited the Fed’s rate decision. Attention stayed fixed on the yen as U.S. and Japanese authorities heaped on fresh comments about the possibility of intervention.

Markets expect the Fed will almost certainly keep rates on hold at 5.25% to 5.50%, putting the focus on the central bank’s forward guidance. Futures markets are pricing in a 30% likelihood of a quarter-point increase in November or 40% chance it will be in December, according to CME FedWatch tool. “We expect the FOMC to retain its forecast of one extra 25 hike by year-end, though it will not follow through with it in our view,” said Carol Kong, economist and currency strategist at the Commonwealth Bank of Australia. Dollar/yen could see some upside pressure after a hawkish FOMC meeting, she added. The yen last sat around 147.83 versus the greenback, off Tuesday’s low of 147.92 though hovering near the 10-month trough against the dollar ahead of the FOMC announcement.

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Japan’s top financial diplomat, Masato Kanda, reiterated warnings on Wednesday, saying Japanese authorities are always in close communication on currencies with U.S. and overseas policymakers while keeping a close watch on market moves with a “high sense of urgency”. Asked whether Washington would show understanding over another yen-buying intervention by Japan, U.S. Treasury Secretary Janet Yellen said overnight it “depends on the details” of the situation. Speculation increased about a possible sooner-than-expected exit from the Bank of Japan’s ultra-loose policy, but the central bank will most likely keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay for the time being amid economic uncertainty.

Elsewhere in Asia, the offshore yuan was largely unchanged after China met market expectations by keeping its benchmark lending rates unchanged on Wednesday, but later ticked down 0.1% to 7.3103 per dollar. The Australian dollar , a proxy for China growth, fell nearly 0.1% in the Asian afternoon, while the New Zealand dollar was flat, down from Tuesday’s two-week high against the dollar. The euro stood at $1.0679, and sterling hung slightly lower at $1.2388. Market eyes will be on UK August CPI released on Wednesday, the last bit of inflation data before the Bank of England makes their rate decision on Thursday. In cryptocurrencies, bitcoin hovered around $27,137, off a three-week high hit on Tuesday.

BRITISH POUND

FXStreet: The official data released by the Office for National Statistics (ONS) showed on Wednesday that the United Kingdom’s (UK) annual Consumer Price Index (CPI) edged 6.7% higher in August, cooling off from a 6.8% rise in July. The market consensus was for a 7.1% increase. The Core CPI index (excluding volatile food and energy items) rose 6.2% YoY in the reported month, compared with a 6.9% acceleration in July while missing estimates of a 6.8% clip.

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Meanwhile, the UK Consumer Price Index rebounded 0.3% MoM in August vs. the 0.7% estimates and the 0.4% decline recorded in the seventh month of the year. The UK Retail Price Index (RPI) for August rose 0.6% MoM and 9.1% YoY, both missing expectations.In a knee-jerk reaction to the UK CPI inflation data, the GBP/USD pair slumped nearly 40 pips to hit fresh multi-month lows below 1.2350. The spot is shedding 0.35% on the day to trade at 1.2345, as of writing.

SOUTH AFRICAN RAND

Reuters: The South African rand firmed on Tuesday as markets await local inflation figures and a central bank interest rate decision in the days ahead. At 1516 GMT, the rand traded at 18.9300 against the dollar, 0.41% stronger than its previous close. “Idling for most of the day the rand has managed to find some marginal strength later on in the day,” said Shaun Murison, senior market analyst at IG. The rand is likely to take its cues from August inflation data to be released on Wednesday and the South African Reserve Bank’s interest rate decision on Thursday.

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Most analysts polled by Reuters expect the bank to leave its main interest rate unchanged at 8.25%. Investors will also be looking at the U.S. Federal Reserve’s interest rate decision on Wednesday. South Africa’s benchmark 2030 government bond was stronger in afternoon deals, with the yield down 2.5 basis points to 10.485%.

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GLOBAL MARKES

Reuters: Stocks struggled for headway on Wednesday while U.S. yields stood at or near decade highs along the curve as surging oil prices stoked inflation and set the scene for the Federal Reserve to project interest rates staying higher for longer. Brent crude futures fell 1% in the Asia session and are off 10-month highs. But at $93.52 a barrel, prices remain up 30% in three months as Saudi Arabia and Russia reduce output.

Higher energy costs led to a bigger-than-expected spike in Canadian inflation, lifting the loonie on Wednesday and triggering selling in bond markets around the world. Britain’s CPI, though still high at 6.7%, unexpectedly slowed, with a sizeable fall in the pace of core price rises sending sterling down 0.4% to an almost four-month low at $1.2334. Benchmark 10-year Treasury yields had hit their highest since 2007 at 4.371% overnight and were last at 4.36%.

Two-year Treasury yields were within a whisker of a similar milestone at 5.09%. S&P 500 futures dipped 0.1%. FTSE futures were down 0.3% and European futures were flat. In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7% with Hong Kong stocks the biggest drag as China left lending rates on hold. Japan’s Nikkei fell 0.6%. All eyes are now on the Fed, with interest rate futures pricing implying almost no chance of a hike at 1800 GMT, leaving the focus to fall on the economic projections and Chair Jerome Powell’s news conference.

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“The previous dot plot saw many participants expecting a cut in 2024. There is no reason for those dots to significantly move,” said Sam Rines, managing director at research firm CORBŪ in Texas. “The ‘risk management’ aspect of the Powell presser is likely to be: positive in regard to downward adjustments to the policy rate as or if inflation wanes, but negative with respect to threats of future tightening.” The Fed meeting leads a week jammed with central bank meetings, with policy announcements in Sweden, Switzerland, Norway, Britain and Japan all due later in the week.

Foreign exchange markets have largely been in a holding pattern ahead of the Fed meeting, though the yen has continued to face pressure that early on Wednesday prompted a riposte from Japan’s top financial diplomat. Masato Kanda told reporters that Japanese authorities were always in close communication with U.S. counterparts and that he wouldn’t rule out any options if “excessive moves persist.” The yen is down 11% on the dollar this year as expectations firm for U.S. rates to stay high and Japanese rates to stay low. The yen hit a 10-month trough of 147.95 to the dollar late last week and it traded at 147.85 on Wednesday. Benchmark 10-year Japanese government bonds remain are at 0.72%, but have been creeping towards the Bank of Japan’s adjusted tolerance for yields 1% either side of zero.

The euro held steady at $1.0684. Commodity exporters’ currencies were firm, with the New Zealand dollar holding modest recent gains at $0.5940 after strong dairy price gains at an overnight auction. The Aussie held at $0.6454 and analysts said markets might be more sensitive to a dovish surprise from U.S. policymakers. “We think that the market may already be semi-braced for a hawkish pause,” said DBS strategist Eugene Low in Singapore. “Short of the Fed delivering beyond what is reasonably expected – that is, hiking rates or removing two cuts per year – we think upside to two-year and three-year dollar rates may be limited.”

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Rising yields have kept a lid on gold prices, with spot gold last trading at $1,929 an ounce. Wheat prices, which had been driven down by huge shipments from Russia, steadied on expectations of dry weather cutting output in Australia and Argentina.

Published by the Mercury Team on 20 September 2023