Sterling dips after tame inflation data

British Pound

Reuters: Sterling dipped on Wednesday after a softer-than-expected reading on British consumer price inflation supported expectations of further interest rate cuts from the Bank of England this year. The pound fell 0.3% to $1.2827, heading for its first session of decline in five against the dollar. It also softened against the euro, with euro/sterling trading up 0.3% at 85.69 pence. Both had been roughly flat before the data. Consumer price inflation rose to 2.2% in July after two months at the BoE's 2% target, official figures showed, but fell short of economists' forecast for an annual rise to 2.3%.

Services price inflation fell to 5.2% in July from June's 5.7%, lower than the Reuters poll forecast of 5.5% and the lowest since June 2022. "The Bank of England will take a huge sigh of relief this morning, having seen services inflation finally coming lower," Kyle Chapman, FX markets analyst at Ballinger Group, said. Money markets show traders are currently pricing in rate cuts of about 46 basis points from the BoE this year, little changed from Tuesday's level. The odds of a September rate cut stand at about 48%.

"Given that we got mixed signals from the jobs report yesterday and there is one more inflation report to go before the September meeting, the next decision is wide open. That said, I expect the Bank to pause at the next meeting and wait for more data before proceeding in November and likely December," Chapman said. The BoE cut rates from a 16-year high earlier this month after a tight vote by its policymakers who were split over whether inflation pressures had eased sufficiently. The pound touched a two-week high on Tuesday after figures showed the UK jobless rate dropped to 4.2% in June - defying expectations for a small rise.

US Dollar

Reuters: The dollar was on the back foot on Thursday, with the euro perched near an eight-month high after data showed U.S. inflation was slowing, underpinning wagers that the Federal Reserve could lower borrowing costs next month. The yen was steady at 147.26 per dollar after data showed Japan's economy expanded by a faster-than-expected annualised 3.1% in April-June, rebounding from the previous quarter due to a solid pickup in consumption. In the U.S., data on Wednesday showed the consumer price index rose moderately, in line with expectations, and the annual increase in inflation slowed to below 3% for the first time since early 2021.

The figures add to the mild increase in producer prices in July in suggesting that inflation is on a downward trend, although traders are now anticipating the Fed to be not as aggressive on rate cuts as they had hoped. Josh Chastant, portfolio manager for public markets at GuideStone Funds, said both the U.S. CPI and PPI data pointed to a 25 basis point cut by the Fed in September. "A lot will depend on the tone of the minutes and post-meeting press conference, but markets could be mildly disappointed if we only get a 25bps reduction," he said.

Markets are now pricing in 64% chance of a 25 bps cut next month and a 36% chance of a 50 bps reduction, the CME FedWatch tool showed. Traders were evenly split at the start of the week between the two cut options following last week's sell-off. Markets anticipate 100 bps of cuts this year from the Fed. "The blinding green light for rate cuts remains firmly switched on, and the Fed is getting the disinflationary evidence it needs to gain confidence to follow through on that," said Kyle Chapman, FX markets analyst at Ballinger Group. "A 50bps cut is a desperate move and would be more dependent on a growth scare."

The euro was steady at $1.10110 in early trading, hovering close to $1.10475, the highest since early January it touched on Wednesday. The single currency is up 0.86% for the week, set for its strongest weekly performance in over a month. Sterling was little changed at $1.2826 after dipping on Wednesday as a softer-than-expected reading on British consumer price inflation supported expectations of further interest rate cuts from the Bank of England this year. The dollar index, which measures the U.S. unit versus six rivals, was last at 102.6, not far from the eight-month low of 102.15 it touched last week.

The index is on course for its fourth straight week in the red, a run it last had in March-April 2023. The investor focus will now be on the U.S. retail sales data due later on Thursday. Elsewhere, the yen inched away from the seven-month high of 141.675 touched during last week's market mayhem. Investors are still digesting Japanese Prime Minister Fumio Kishida's decision to step down next month, although analysts said the news has had limited impact on markets. The New Zealand dollar was last little changed at $0.5997 having dropped more than 1% in the previous session after the Reserve Bank of New Zealand reduced the cash rate by a quarter point, its first easing since early 2020.

The Australian dollar was steady at $0.6595 ahead of labour data that could influence interest rate expectations. A lower unemployment rate could lead markets to wind back pricing for an interest rate cut from Australia's central bank this year and support the Aussie dollar, according to Kristina Clifton, senior economist at Commonwealth Bank of Australia.

South African Rand

Reuters: South Africa's rand firmed on Wednesday after U.S. inflation data strengthened expectations that rate cuts in the world's biggest economy are near. At 1535 GMT, the rand traded at 18.0575 against the dollar, about 0.2% stronger than its previous close. Like other risk-sensitive currencies, the rand often takes direction from global drivers like U.S. economic data and monetary policy in addition to local factors. U.S. consumer prices rose moderately in July and the annual increase in inflation slowed to below 3% for the first time since early 2021, data on Wednesday showed.

"The data suggests that the Federal Reserve may be more inclined to lower interest rates as inflation is approaching the 2% target," said Wichard Cilliers, head of market risk at TreasuryONE. On the domestic front, data from the South African Chamber of Commerce and Industry showed that its Business Confidence Index rose to 109.1 in July, up from 109.0 in June and 107.8 in May. Separately Statistics South Africa figures showed retail sales rose 4.1% year on year in June after rising by a revised 1.1% in May.

On the stock market, the Top-40 index closed about 0.5% up. South Africa's benchmark 2030 government bond was stronger, with the yield down 13 basis points to 9.135%.

Global Markets

Reuters: Asian stocks were firm on Thursday while the dollar remained on the back foot amid lower U.S. Treasury yields after benign consumer inflation data overnight reinforced bets for the Federal Reserve to start cutting interest rates next month. Regional equities took their lead from gains on Wall Street, with Japan's Nikkei rising 0.5% as of 0139 GMT and Australia's stock benchmark up 0.1%. Mainland Chinese blue chips added 0.4%, although Hong Kong's Hang Seng slipped 0.3%.

U.S. S&P 500 futures pointed 0.1% higher after the cash index advanced 0.4% on Wednesday, buoyed by the slowest rise in the consumer price index in more than three years. The dollar remained weak after slumping overnight to its lowest level to the euro since the end of last year. The single currency traded flat at $1.1009 after reaching $1.10475 in the previous session. The 10-year Treasury yield ticked up slightly to 3.84% in Asian hours, after dipping to as low as 3.811% on Wednesday.

Traders remain convinced that the Fed will reduce rates on Sept. 18 for the first time in 4-1/2 years, but are split on whether policy makers will opt for a super-sized 50 basis-point reduction. While inflation is slowing, signs it may remain sticky spurred a reduction of bets on a larger cut to 37.5% from about 50% a day earlier. A major macroeconomic test looms later on Thursday with the release of U.S. retail sales figures. "If we were to see a negative retail control sales number, it would likely set alarm bells ringing, given the market's recent concerns about a recession in the U.S.," said Tony Sycamore, a market analyst at IG.

The dollar was stable at 147.35 yen as the pair continued its week-long consolidation around the 147 mark. Sterling remained depressed after soft UK inflation figures hinted at faster, deeper Bank of England rate cuts. The currency was flat at $1.2824 after sagging 0.3% on Wednesday. The Australian dollar was at $0.6600, erasing early losses to be slightly higher following a choppy reaction to an increase in employment. Gold edged up 0.1% to $2,449.60 per ounce after Wednesday's 0.7% dive.

Oil prices rose on Thursday, recovering some of the previous day's loss, on hopes that potential Fed rate cuts would boost demand. Brent crude futures added 0.2% to $79.93 a barrel, and U.S. West Texas Intermediate crude increased 0.3% to $77.21. Both benchmarks fell more than 1% on Wednesday after an unexpected rise in U.S. crude inventories.

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