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The U.S. dollar advanced on Wednesday, hovering near two-month highs as market expectations of modest Federal Reserve rate cuts supported the currency. Meanwhile, the British pound saw a significant drop after inflation data suggested a softer economic outlook.
Dollar Gains Amid Adjusted Rate Cut Expectations
The Dollar Index, which measures the greenback against six major currencies, rose 0.1% to 103.180, remaining near Monday’s two-month high. Recent U.S. economic data, showcasing resilience coupled with slightly higher-than-expected inflation for September, has prompted traders to scale back expectations for aggressive rate cuts from the Federal Reserve.
Atlanta Federal Reserve President Raphael Bostic reinforced this view on Tuesday, indicating that only one more 25-basis-point rate cut is likely this year. Market participants are betting on two cuts in total this year, with 92% of traders expecting a 25-bps reduction during the Fed’s next meeting in November.
Sterling Slumps on Soft Inflation Data
In the UK, the pound fell sharply, with GBP/USD down 0.5% to 1.3003. British inflation data for September showed a larger-than-expected decline, falling to 1.7% on an annual basis. This was below both the forecast of 1.9% and the previous month’s 2.2%, marking the first time inflation has dipped below the Bank of England’s 2% target since April 2021. The softer inflation data signals a likely rate cut by the Bank of England next month.
This follows other weak data from earlier in the week, which revealed that British wage growth had slowed to its lowest level in over two years, further supporting the case for a rate reduction.
Euro Holds Steady Ahead of ECB Decision
The euro edged lower, with EUR/USD down 0.1% to 1.0882. Investors are focused on the European Central Bank’s policy meeting on Thursday, where a third rate cut this year is widely expected. Financial markets have nearly fully priced in a reduction of the ECB’s deposit rate to 3.5%.
Yuan Recovers Slightly Amid Stimulus Uncertainty
China’s yuan saw some stabilization, with USD/CNY dipping slightly to 7.1179. However, the yuan has been nursing losses for the week amid uncertainty over China’s plans to stimulate its economy. Although the Ministry of Finance announced a series of fiscal measures aimed at boosting growth, the absence of details on the size and timing of these measures has raised doubts about their effectiveness.
Yen Approaches Key Level Against Dollar
The Japanese yen weakened further, with USD/JPY rising 0.2% to 149.43, approaching the critical 150 level. Markets are now awaiting Japan’s consumer inflation data, due later this week, for more clues on whether the Bank of Japan will continue with its current monetary policy or consider further rate hikes.
