Dollar rebounds after Fed goes big on rate cut

British Pound

FXStreet: The GBP/USD pair finds some support near the 1.3150 region on Thursday and for now, seems to have stalled its retracement slide from the 1.3300 neighbourhood, or the highest level since March 2022 touched the previous day. Spot prices climb closer to the 1.3200 mark during the Asian session, albeit lack follow-through amid some follow-through US Dollar buying and currently trade with modest intraday losses. The US Federal Reserve decided to kick-start the policy-easing cycle and lowered borrowing costs by 50 basis points on Wednesday, though cooled hopes for oversized rate cuts going forward.

Furthermore, Fed policymakers don't see inflation returning to the 2% target before 2026, triggering a sharp recovery in the US Treasury bond yields. This, in turn, lifts the USD Index, which tracks the Greenback against a basket of currencies, to a one-week high and turns out to be a key factor exerting some downward pressure on the GBP/USD pair. Meanwhile, expectations that the Bank of England's rate-cutting cycle is more likely to be slower than in the United States continue to underpin the British Pound and help limit losses for the currency pair.

The UK Consumer Price Index report released on Wednesday showed that inflation in the services sector accelerated more than expected in August. This reaffirmed bets that the BoE would hold rates steady at the end of the September policy meeting later this Thursday and warrant caution before placing bearish bets around the GBP/USD pair. Traders might also prefer to move to the side-lines heading into the key central bank event risk. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the GBP/USD pair is to the upside.

That said, the two-way price action witnessed over the past few days, along with the overnight failure near the 1.3300 mark, warrants some caution for bullish traders. Hence, some follow-through buying is needed to support prospects for an extension of the pair's move up from the 1.3000 psychological mark, or the monthly low touched last week.

US Dollar

Reuters: The U.S. dollar rose broadly on Thursday, recovering from an earlier tumble in the immediate aftermath of the Federal Reserve's outsized interest rate cut that had been largely priced in by markets. The U.S. central bank on Wednesday kicked off its monetary easing cycle with a larger-than-usual half-percentage-point reduction that Chair Jerome Powell said was meant to show policymakers' commitment to sustaining a low unemployment rate now that inflation has eased.

While the size of the move had been anticipated by investors in part due to a slew of media reports pointing in that direction ahead of the decision, it defied the expectations of economists polled by Reuters, who were leaning toward a 25-basis-point cut. Still, markets reacted in a typical "buy the rumour, sell the fact" fashion that kept the dollar on the front foot in early Asian trade. It rebounded from a more than one-year low against a basket of currencies in the previous session and was last marginally higher at 101.03.

Against the yen, the greenback gained 0.58% to 143.12. The euro fell 0.04% to $1.1113, away from a three-week high hit in the previous session. "Obviously, there was a lot of volatility on the announcement, but in terms of the pricing action and the information that came out it's not really that controversial in a sense," said Rodrigo Catril, senior FX strategist at National Australia Bank. "It's sort of been pretty close to what the market has been pricing, particularly in terms of expectations of - arguably a little bit more than a 100 - but 100 bps of rate cuts this time around and another 100 next year, and also a terminal rate that is below 3% as well. So the big picture is not materially different."

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026, though they said the outlook that far into the future is necessarily uncertain. "Our view is that the dollar will depreciate next year. That is a cyclical story, not a structural story," said Eric Robertsen, Standard Chartered's global head of research and chief strategist at a media roundtable in Singapore on Wednesday.

"We think the dollar is going to weaken because the Fed is easing interest rates and the global economy will experience a soft landing, which tends to be a benign scenario that tends to be negative for the dollar." Sterling fell 0.11% to $1.3199 after scaling a peak of $1.3298 in the previous session, its strongest level since March 2022. That came in the wake of data on Wednesday which showed British inflation held steady in August but sped up in the services sector closely watched by the Bank of England, reinforcing bets that the central bank will keep interest rates on hold later in the day.

"When it comes to the Bank of England, clearly those inflation numbers yesterday show that they still have a concern or a problem with inflation, and in particular services inflation is still too high for comfort," said NAB's Catril. "So to expect an easing today because of what the Fed has done seems a little bit too hard to believe." Elsewhere, the Australian dollar edged up 0.05% against its U.S. counterpart to $0.6768, while the New Zealand dollar advanced 0.04% to $0.6210. Data out on Thursday showed New Zealand's economy contracted in the second quarter as activity fell in a number of industries, though the figures came in better than forecasts.

South African Rand

Reuters: The South African rand firmed to a near 14-month high on Wednesday ahead of an expected U.S. Federal Reserve interest rate cut and after the local inflation rate fell more than expected. At 1511 GMT, the rand traded at 17.5525 against the dollar, 0.27% firmer than its previous close. It earlier hit 17.53 per dollar, its strongest level since July 2023. Markets are certain the Fed will cut rates when it makes its policy announcement on Wednesday and bets are on a 50-basis-point interest rate cut in the world's biggest economy.

South Africa's inflation fell to its lowest since April 2021, reinforcing expectations that the local central bank will also cut interest rates on Thursday. Annual inflation in August stood at 4.4%, just below the 4.5% forecast by analysts polled by Reuters. The South African Reserve Bank prefers inflation at the midpoint of its 3% to 6% target range. "We believe that the lower inflation trajectory and the start of the cutting cycle in major economies will also prompt the SARB to begin cutting interest rates tomorrow," Nedbank economists said in a research note.

Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. monetary policy in addition to domestic data points. Economists polled by Reuters predict a 25 bp cut to the central bank's main interest rate. On the stock market, the Top-40 index closed 0.44% lower. South Africa's benchmark 2030 government bond was slightly stronger, with the yield down 1 basis point to 8.845%.

Global Markets

Reuters: The dollar bounced, long-dated bond yields were up and Asian stocks rose after the U.S. Federal Reserve announced a 50-basis-point rate cut and flagged that its easing cycle would be measured. The S&P 500 hit a record high overnight and although it closed slightly lower, futures rose 0.67% in the Asia day. Nasdaq futures were up 1%. Japan's Nikkei jumped 2.5% and stock markets in Australia and Indonesia hit record highs. The Fed lowered its window for the benchmark policy rate by 50 basis points to 4.75-5%, where traders had been leaning before the decision. The dollar immediately hit a two-and-a-half-year low on sterling, but then recoiled sharply.

It was up nearly 1% to 143.55 yen early on Thursday and well off lows on the euro at $1.1097. Ten-year Treasury yields have climbed nearly eight basis points from a day earlier to 3.719%, while gold shot to a record high just shy of $2,600 an ounce, before easing back to steady at $2,559. The Fed's cut is expected to support spending and the U.S. economy, and encourage other central banks to cut rates. "The key was never going to be about 25 or 50, it's all about the path forward and I think they've outlined a view where the economy is still doing pretty well," said BNZ strategist Jason Wong in Wellington. "This wasn't a panicked 50bp cut."

Policymakers' adjusted their median rates projection downwards, compared with their outlook in July, but Fed chair Jerome Powell emphasised flexibility. "I do not think that anyone should look at this and say, oh, this is the new pace," Powell told reporters after the outsized cut was announced. "We're recalibrating policy down over time to a more neutral level. And we're moving at the pace that we think is appropriate, given developments in the economy." MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.3%. Hong Kong and China logged broad gains on the view that Beijing is more likely to roll out stimulus now that the Fed has moved.

Chinese bond yields fell. South Korean markets returned from holidays with a thud after a downbeat Morgan Stanley note, which halved SK Hynix's target price, prompted selling in chip stocks. SK Hynix shares tumbled 8.7% and Samsung fell 3.1%. Oil prices fell and benchmark Brent crude futures were last down 0.3% at $73.42 a barrel. Around the region lower U.S. rates in theory give emerging markets leeway to cut their policy rates to support growth. Bank Indonesia moved a few hours before the Fed, with a 25-basis-point cut on Wednesday.

The Bank of England meets later on Thursday and is seen holding rates at 5%, especially after inflation figures showed services inflation picked up in August. The Bank of Japan sets policy on Friday, and is expected to stand pat but line up future hikes, perhaps as soon as October.

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