Dollar firm after US data quells recession fears

British Pound

Reuters: The pound strengthened a touch on Thursday after data showed Britain's economy grew in line with economists' expectations in the second quarter of 2024. Sterling was last up 0.2% on the dollar at $1.2854, and also strengthened versus the euro, which dipped 0.19% to 85.68 pence. The economy grew by 0.6% in the second quarter of 2024, in line with forecasts and building on a 0.7% recovery in the first quarter of the year, after a shallow recession in the second half of 2023, official figures showed.

Analysts however also noted that growth in government spending contributed to the increase, while private consumption growth was fairly lacklustre. "What we really want to see is an increase in consumer spending, and from that point of view I think the gains in the pound could fade as it leaves the door open to further Bank of England rate cuts," said Jane Foley, head of FX strategy at Rabobank. The BoE cut rates earlier this month from a 16-year high, and market pricing currently reflects two further 25 basis point rate cuts this year, though with just under a 40% chance of another cut priced for the BoE's September meeting, traders expect it to move cautiously.

"We don't think there is enough evidence for the bank to go back to back, with services inflation still at 5.2%," said Foley. British consumer price inflation increased for the first time this year in July, official figures showed on Wednesday. Annual services price inflation fell to 5.2% in July from June's 5.7%, but was below all forecasts in a Reuters poll and was the lowest since June 2022.

US Dollar

Reuters: The dollar hovered near a two-week high to the yen after its biggest one-day gain against major peers in four weeks as firm U.S. economic data all but eliminated fears about a recession. The greenback was especially strong against the Japanese currency thanks to a surge in Treasury yields as traders pared back bets the Federal Reserve would be forced into aggressive easing next month. Risk-sensitive currencies like sterling were firm as the improved economic outlook spurred a rally in equities.

The dollar index, which measures the greenback against six major peers including the yen, sterling and euro, was little changed at 103.20 after rallying 0.41% overnight, the most since July 18. The dollar eased slightly to 149.11 yen, but remained close to Thursday's high of 149.40, a level last seen on Aug. 2. The Commerce Department said retail sales rose 1.0% last month, topping forecasts for a 0.3% gain. Separate figures showed 227,000 Americans filed for unemployment benefits last week, fewer than the 235,000 expected.

Traders are convinced the Fed will slash rates on Sept. 18, but had debated the size of the reduction. Odds currently stand at 25% for a super-sized 50 basis-point cut, down from 36% a day earlier, according to the CME Group's FedWatch Tool. Surprisingly soft monthly payrolls data at the start of the month had pushed the odds of the larger cut to 71%. "Growth is in a better spot and the consensus is again subscribing to the 'soft landing' thesis," said Chris Weston, head of research at Pepperstone, pointing to 150 yen per dollar as the next level to watch for the currency pair.

"While there are always risks that could impact, there is little in the data flow now to really derail sentiment in the immediate near-term." Sterling edged up slightly to $1.2859, building on its overnight 0.21% advance. The British currency got an additional boost from solid GDP figures on Thursday. The euro was flat at $1.0973, following a 0.36% slide in the previous session. The risk-sensitive Australian dollar held steady at $0.66105 having advanced 0.2% the previous day after data showed a much-bigger-than-expected surge in jobs.

South African Rand

Reuters: South Africa's rand was not deterred by dollar gains on Thursday, firming after stronger-than-expected U.S. economic data and as markets look toward Federal Reserve comments at a meeting of global central bankers next week, analysts said. At 1535 GMT, the rand traded at 18.00 against the dollar, about 0.4% firmer than its previous close. The dollar rose against a basket of global currencies on Thursday after U.S. economic data ease fears of a recession risk and dampened expectations for aggressive interest rate cuts in the world's biggest economy.

"Despite the dollar firming across the board against most major currencies emerging market currencies have still been able to grind out gains," said Wichard Cilliers, head of market risk at TreasuryONE. "Tomorrow's data calendar has little to be wary of, and markets are likely waiting for FOMC comments at the Jackson Hole symposium later this month," Cilliers added. Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. economic data and monetary policy, in addition to local data points.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed up over 1%. South Africa's benchmark 2030 government bond was weaker, as the yield gained 9.5 basis points to 9.23%.

Global Markets

Reuters: Asian shares were headed for a weekly gain on Friday and Japan's benchmark Nikkei was poised for its best week in more than four years as upbeat risk sentiment spilled over from Wall Street, while the dollar and U.S. Treasury yields held broadly steady. Last week's market turmoil calmed this week after a raft of U.S. economic data allayed recession fears in the world's largest economy and pushed back expectations for aggressive U.S. rate cuts. "Our assessment is that the market fallout from the weak early August U.S. data was disproportionate," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

In large part, it reflected the rapid unwinding of crowded positions in some markets, he added. "While the risk of a recession in the United States has increased a little, there are few signs of a more substantial crisis brewing." MSCI's broadest index of Asia-Pacific shares outside Japan advanced 1.3% and was set to rise more than 2% for the week, while U.S. futures extended gains following a strong overnight cash session on Wall Street. S&P 500 futures rose 0.13%, while Nasdaq futures added 0.2%. EUROSTOXX 50 futures gained 0.17%, though FTSE futures dipped 0.06%.

Strong U.S. retail sales data and low weekly jobless claims were the latest shot in the arm for the positive risk mood, following this week's benign inflation report that reaffirmed bets for imminent Fed rate cuts, but likely at a measured pace. Markets are now pricing in just a 25% chance of a 50-basis-point cut by the Federal Reserve next month, down from 55% a week ago, according to the CME FedWatch tool. "The totality of data tells us disinflation is continuing and the Fed is almost certain to cut rates in September by 25 bps," said David Chao, Invesco's global market strategist for Asia Pacific ex-Japan. "But I do believe that the July inflation report diminishes the chances of a super-size cut, though this was never in the cards."

Japan's Nikkei jumped nearly 3%, outperforming other Asian benchmarks as Chinese blue-chips ticked marginally higher, and Hong Kong's Hang Seng Index rose 2.1%. The Nikkei was poised for a weekly gain of about 8%, its best performance since April 2020, following last week's heavy losses exacerbated by the unwinding of yen-funded trades. Friday's gains were partly helped by a weaker yen which last stood at 148.90 per dollar, languishing near a two-week low of 149.40 hit in the previous session and some distance away from last week's seven-month peak.

The Swiss franc, which also surged last week on the back of a flight to safety, was last at 0.8712 to the dollar and looked set to lose more than 0.6% for the week. In other currencies, the euro struggled to break above the level of $1.10 against a firmer dollar, which was buoyed by elevated U.S. Treasury yields. The two-year yield hovered near its highest in more than a week, to last stand at 4.0749%, while the benchmark 10-year yield steadied at 3.9035%. In commodities, oil prices edged lower on Friday, though set for a weekly gain, as the upbeat U.S. data eased investor worries about a potential recession in the world's top oil consumer.

Brent crude futures dipped 0.35% to $80.76 per barrel, while U.S. West Texas Intermediate crude futures eased 0.5% to $77.78 a barrel. Still, the two were eyeing a weekly gain of more than 1% each. Spot gold dipped 0.13% to $2,452.77 an ounce.

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