Fed cut expectations sent the DXY Index to 100.72 last Friday, near December’s 100.62 low, but was still above the 99.58 low in July 2023. Fed Chair Jerome Powell announced at Jackson Hole that the time has come to adjust monetary policy. Powell was crystal about the Fed’s shift from pulling down inflation from its peak towards preventing a further cooling in the labour market, adding that the Fed had ample room to respond to any risks here. In the short term, the oversold DXY could consolidate on surprises in this week’s US data, especially the PCE deflator on August 30, pushing back the futures market’s bet for a 50 bps cut. However, we will assess the DXY’s prospects to trade below 100 over the medium term. The US monthly jobs report on September 6 will be critical. Apart from the telegraphed rate cut in September, the Fed’s revisions to the Summary of Economic Projections will be significant. In June, the Fed projected 1-2 rate cuts in 2H24, followed by 200 bps of cuts over 2025-2026.
Conversely, Bank of England Governor Andrew Bailey did not offer rate guidance for the September 19 meeting. The BOE’s 5-4 vote to lower the bank rate by 25 bps to 5% on August 1 reflected a divided monetary policy committee. Bailey cautioned against expecting the BOE to lower interest rates “too quickly or by too much.” Although the UK’s CPI inflation hit the 2% target in May-June, it rose again to 2.2% in July, in line with the BOE’s projection for inflation to reach 2.75% by the end of 2024.
The European Central Bank was also unclear if a rate cut was imminent in September. According to the ECB Minutes for the July 17-18 meeting, Chief Economist Philip Lane proposed keeping the three key policy rates unchanged. Lane warned at Jackson Hole that the goal of getting inflation to the 2% target was “not yet secure.” The minutes stated that the September meeting was a good time to re-evaluate the level of monetary policy restriction and should be approached with an open mind. On August 30, a lower CPI inflation in August (2.2% YoY vs 2.6% previously) and an uptick in the unemployment rate (6.5% vs. 6.4% previously) would underpin the OIS market’s bet for a 25 bps rate cut in September.
USD/JPY plunged 2.2% to 144.37 last week, opening the door to retesting the 141.70 low in early August. At the special parliamentary hearing on August 23, Bank of Japan Governor Kazuo Ueda stood by the decision to keep hiking rates if the central bank’s median economic forecasts were met or exceeded. Ueda attributed the brief market volatility from July 11 to August 5 to rising fears of a US recession from the Fed’s rate cut bias on rising joblessness, not the BOJ’s rate hike.
USD/SGD fell to 1.30 for the first time since November 2014. We are mindful that the oversold USD/SGD could consolidate in the short term. We see the Monetary Authority of Singapore slightly easing the appreciation pace of the SGD NEER policy band in mid-October after the Fed’s expected rate cut in September. Singapore’s core inflation declined to 2.5% YoY in August, its lowest since January 2022. We are also assessing the potential for USD/SGD to start trading below 1.30 later this year, especially if the DXY breaks firmly below 100, barring an unexpected global recession or a financial crisis.
Quote of the day
”Comets are like cats; they have tails and they do exactly what they want.”
David H. Levy
26 August in history
In 1682, English astronomer Edmond Halley first observed the comet named after him.
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