Sterling traded higher but stays close to two-week lows

Reuters: Sterling traded higher against the U.S. dollar on Tuesday, staging a small rebound after a seven-day losing streak, but stayed close to a two-week low as traders keep their attention on Britain’s floundering economy.

BRITISH POUND STERLING TRADED HIGHER

At 1023 GMT, the pound was 0.16% up against the dollar at $1.28460 , while it ticked 0.32% higher versus the euro to 86 pence. For Stuart Cole, chief macro economist at Equiti Capital, Tuesday’s modest uptick is a sign of sterling sellers squaring off their positions until Wednesday’s Federal Reserve meeting is out of the way, in case it comes with a more dovish slant which could boost the pound. “The market has taken a more downbeat view of sterling following the CPI – and the PMI – figures, as they do not expect the BoE to hike as far as previously anticipated,” Cole said.

Earlier this month, traders were placing bets on a Bank of England terminal rate close to 6.5%, but this has fallen to around 5.8%, said Cole, after Britain’s high rate of inflation fell by more than expected in June. Further compounding the downward revision of interest rate expectations is the UK’s slowing economy, with a survey on Monday showing Britain’s private sector growing at its slowest pace in six months in July. According to Ipek Ozkardeskaya, senior analyst at Swissquote Bank, it has prompted traders’ attention to switch to the UK economy. Traders are putting “more weight on the damage that the rising Bank of England rates will do to the British economy, than on the good they might do to sterling holders,” wrote Ozkardeskaya in a note.

ALSO READ: Newspaper front pages from around the world, 26 July 2023

The BoE has already raised the rate 13 times since late 2021 from 0.1% to try to calm inflation. Traders are predicting a 60% chance of a 25 bps hike from the BoE at its next meeting on August 3, and a 40% chance of a larger 50 bps hike. “If anything, the moves have simply exposed the truth that the sterling strength we had been seeing was nothing more than an interest rate play as opposed to anything more structural,” said Equiti’s Cole.

U.S. DOLLAR

Reuters: The dollar hovered close to a two-week high versus the euro on Wednesday, while the yen consolidated near the middle of its range this month as traders awaited crucial policy decisions from the respective nations’ central banks this week. The Australian dollar slid after slower-than-expected inflation data suggested the Reserve Bank of Australia would forgo a rate hike next week. The U.S. dollar index – which measures the currency against six major peers, but is heavily weighted toward the euro – was little changed at 101.33 in the Asian afternoon, after pushing as high as 101.65 overnight for the first time since July 11. The euro slipped 0.08% to $1.10495, bringing it close to the previous session’s low of $1.1036, a level last seen on July 12.

Continued signs of a resilient U.S. economy in the face of the Federal Open Market Committee’s steep series of interest rate increases has helped buoy the dollar index from a 15-month trough of 99.549 reached a week ago. In the latest data, U.S. consumer confidence rose to a two-year high in July amid a persistently tight labor market and receding inflation. Money market traders see a quarter point hike from the U.S. Federal Reserve later on Wednesday as a near certainty, but are split on the odds of another later in the year, putting it at more or less a coin toss.

ALSO READ: Who is the richest person in the world today? Top 10 list – 26 July 2023

Elsewhere, the European Central Bank sets policy on Thursday. Again, a quarter point hike is widely expected, but building evidence of an economic slowdown has called into question the chances of another by year-end. “Given the deceleration in underlying inflation, we think the risk is Fed Chair Jerome Powell cools on another hike by describing the FOMC as ‘data dependent,’” which would pressure the dollar, said Joseph Capurso, a strategist at Commonwealth Bank of Australia. “If the ECB retain their hawkish bias, by no means guaranteed but more likely than the FOMC, EUR is likely to track higher this week.” The Bank of Japan sets policy on Friday, and speculation for a hawkish tweak to the yield curve control, which had soared earlier in the month, has steadily receded over recent days.

The dollar edged 0.04% higher to 141.025 yen on Wednesday, following a rebound from a multi-week low of 137.245 mid-month. Sterling eased 0.1% to $1.2888. The Bank of England sets rates on Aug. 3. The Australian dollar, one of the big movers in the Asian session, slid 0.43% to $0.6763 after inflation slowed more than expected in June, reducing pressure for another hike in rates by the central bank on Aug. 1. That unwound much of the Aussie’s 0.79% gain of the previous day, after Beijing announced stimulus, lifting the economic outlook for Australia’s key trading partner. “Just when it looked safe to get back in the water with Aussie longs on the China sentiment rebound, the downside surprise on inflation casts fresh doubt on the extent of further RBA tightening needed,” said Sean Callow, a strategist at Westpac, predicting the currency could drop below $0.67 near term. Against the Chinese yuan, the U.S. dollar strengthened 0.29% to 7.1577 yuan in offshore trading retracing part of the previous day’s 0.67% decline.

SOUTH AFRICAN RAND

Reuters: The South African rand extended gains from the previous session on Tuesday as China’s pledges to increase support for its sputtering economy boosted risk appetite globally. At 1534 GMT, the rand traded at 17.6150 against the dollar, about 0.7% stronger than its closing level on Monday. The rand is up more than 6% this month against the U.S. currency, recovering further from a record low struck in early June. “Buoyed by Chinese optimism after the global superpower pledged to provide stimulus for the flailing economy, bolstering the traditional positive relationship it maintains with the rand,” DailyFX analyst, Warren Venketas, said in research note.

ALSO READ: Who are the richest South Africans in the world today? – 26 July 2023

China’s top leaders pledged on Monday to step up help for the economy amid a tortuous post-COVID recovery and signalled that there would be more to come for the property industry. On the stock market, the Top-40 and the broader all-share indices both rose almost 1%. South Africa’s benchmark 2030 government bond was weaker, with the yield up 2.5 basis points to 10.285%.

GLOBAL MARKETS

Reuters: Asian markets were trading mostly weaker on Wednesday ahead of the U.S. Federal Reserve’s expected interest rate rise to be delivered later in the day, as investors also weighed the likelihood of a Chinese economic stimulus package. MSCI’s broadest index of Asia-Pacific shares outside Japan was flat, after U.S. stocks ended the previous session with mild gains. The index is up 3.8% so far this month. The yield on benchmark 10-year Treasury notes rose to 3.8924%, compared with its U.S. close of 3.912% on Tuesday. The two-year yield , which rises with traders’ expectations of higher Fed fund rates, touched 4.8848% compared with a U.S. close of 4.893%. Australia was the only major market across the Asia Pacific region to see shares rise, with the S&P/ASX 200 index up 0.81%. Japan’s Nikkei stock index was off 0.12%.

In Hong Kong, the Hang Seng index was down 0.54% and China’s blue chip CSI300 index was off 0.13% in early trade. Positive sentiment returned to China’s market on Tuesday, when the CSI 300 Index snapped a six-day losing streak by closing up nearly 3% to record the best day since last November. On Wall Street, the three main indices closed higher, led by gains in shares of technology, materials and communication services companies. The Dow Jones Industrial Average rose 0.08% to 35,438.07, the S&P 500 gained 0.28% to 4,567.46 and the Nasdaq Composite added 0.61% to 14,144.56.

ALSO READ: Tax 101: Reduce your contribution with tax-free savings accounts

The Fed’s July decision will be announced later on Wednesday following its two day meeting. The benchmark rate is expected to be lifted to a range between 5.25% and 5.5%. “Global equity markets traded positively ahead of the Fed announcement where it is widely expected to hike 25 basis points,” ANZ economists wrote in a note Wednesday.”A follow-up hike is partially priced in over the second half, but we think this will be the last hike this cycle,” the economists said, adding ANZ did not expect a U.S rate cut until the second quarter of 2024. The prospect of a China stimulus package is still being mulled by investors after the country’s top leaders this week flagged policy support for the COVID-ravaged economy.

No details were given on a potential stimulus, but state media reported China would implement its macro adjustments “in a precise and forceful manner”. “There is discussion among investors as to whether China could implement an old-school stimulus in the property sector and look to support developers, which is positive for steel consumption and producers,” said Karen Jorritsma, head of equities in Australia at RBC Capital Markets. “Or whether it will be a consumer led stimulus to boost consumption and that is not as positive for the big resources names. But overall in markets confidence has improved, people are starting to look through the noise and that is a positive,” she said.

ALSO READ: DA condemns witness intimidation in R320milion corruption trial

The dollar rose 0.02% against the yen to 140.93 . It is still some distance from its high this year of 145.07 on June 30. The euro was flat at $1.1048, having gained 1.26% in a month. The dollar index , which tracks the greenback against a basket of currencies of other major trading partners, was down at 101.32. U.S. crude dipped 0.49% to $79.24 a barrel. Brent crude was down 0.48% at $83.24 per barrel. Gold was slightly higher, with spot gold trading at $1964.9188 per ounce.