Key points:
Initial jobless claims have cast doubt over the U.S. labour market’s strength, and in turn, it has led traders to bet on the Fed cutting interest rates by 0.25% at its next meeting in November.
A week ago, there was a much greater chance of a more aggressive 0.5% cut. This shift in sentiment caused U.S. Treasury yields to fall, with the two-year yield dropping to 3.9531% as traders adjusted their expectations.
See: U.S. dollar index (USDX) is currently trading at 102.640, with the open price at 102.655 on the VT Markets app.
As the Fed weighs the need for price stability against full employment, the recent uptick in consumer prices might act as a counterbalance to labour market concerns.
The CPI data released on the same day as the jobless claims report offered a reminder that inflationary pressures still require attention.
Yet, traders appear more focused on the risk of an economic slowdown, thus increasing their bets for a rate cut.
The U.S. dollar index fell from 103.17, its highest since August 15, to 102.84, reflecting the mounting speculation that the Fed will adopt a more dovish stance.
However, the dollar remains up 0.39% for the week, after surging 2.06% in the previous week.
This movement reflects the uncertainty around whether the Fed will lean toward economic stimulus or continue battling inflation.
In case you missed it: Dollar Holds Near 7-Week High on Jobs Data
Meanwhile, different signals from Fed officials have created confusion in the market.
Chicago Fed President Austan Goolsbee suggested that the Fed might lower rates “a fair amount,” while Atlanta Fed President Raphael Bostic implied the Fed could hold off on cuts for now.
This uncertainty has contributed to volatility but hasn’t dramatically altered the market’s broader outlook.
In foreign exchange, the dollar inched up 0.06% against the yen to 148.68, pushing back toward the previous session’s peak of 149.58.
The euro stabilised at $1.09365 after bouncing from a two-month low. The Australian dollar saw a minor recovery as well, holding at $0.67395 after bouncing from a low of $0.6702.
We expect the dollar to remain under pressure if further labour market data confirm the signs of weakness.
However, the trajectory of inflation will likely continue to play a pivotal role in shaping the Fed’s policy response, leaving room for further swings in currency and bond markets.
While traders are currently betting on a quarter-point rate cut, inflationary pressures could still prompt the Fed to pause or reconsider its strategy altogether.
The upcoming policy moves from China may also bring some added volatility to the commodity-linked currencies such as the Australian dollar.
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