Sterling dips against dollar but continues to rise versus euro

British Pound

Reuters: Sterling dipped from two-year highs touched against the dollar but made further ground versus the euro on Wednesday as investors focussed the prospect of diverging monetary policies in the United States and Britain. The pound slipped 0.3% to $1.3218, having climbed to its strongest level since March 22 at $1.3269 on Tuesday. It was also on track for a 3.2% rise in August, its biggest monthly gain since November 2023. Soft U.S. economic data and Federal Reserve Chair Jerome Powell's comments last week fuelled bets that the U.S. central bank will soon start on a series of interest rate cuts, pushing the dollar lower against a swathe of currencies.

The pound also benefited from improving domestic economic data and a cautious tone struck by Bank of England Governor Andrew Bailey last week on further rate cuts. The BoE cut its main interest rate by 25 basis points to 5% in early August, and traders see further rate cuts of 41 bps by the end of the year. The Fed however is seen cutting rates by 103 bps across the three policy meetings that is left this year, market pricing shows. Traders are also debating a possibility of a large 50 bps rate cut next month.

Meanwhile, Prime Minister Keir Starmer said on Tuesday it would take a long time to rebuild Britain and rid it of the rot he says took hold under the previous Conservative government, warning "things will get worse before they get better". "The markets seem to be focused on diverging monetary policies but diverging fiscal policies, mild consolidation in the UK vs on-going laxity in the US, will possibly mean less divergence in monetary policy than markets are pricing," said Colin Asher, senior economist at Mizuho. Against the euro, the pound rose for a sixth straight session and traded at a near one-month high. Euro/sterling was last down 0.2% at 84.18 pence per euro.

US Dollar

Reuters: The dollar steadied on Thursday as it nursed some of its steep losses from previous sessions, with traders looking ahead to a key U.S. inflation reading at the end of the week that could offer further clues on the outlook for rates there. Friday's release of the core personal consumption expenditures price index - the Federal Reserve's preferred measure of inflation - headlines a week that's otherwise been lacking on major market moving data, leaving currencies mostly range bound.

Still, the dollar held to its overnight gains in early Asia trade on Thursday, after having risen 0.48% against a basket of major peers in the previous session. Analysts also attributed the rise to month-end demand. The euro was off its 13-month high and last bought $1.1130. Sterling rose 0.08% to $1.3201, but was some distance away from Tuesday's peak of $1.3269, its strongest level since March 2022. The Australian dollar eased away from an eight-month top and last stood at $0.6793.

"PCE is definitely this week's most important print in the U.S., but I doubt it will materially move market expectations for FOMC policy unless there is a significant miss," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. Markets have fully priced in a 25-basis-point rate cut from the Fed next month, with a 34.5% chance of an outsized 50bp reduction, according to the CME FedWatch tool. Investor bets for imminent U.S. rate cuts were further cemented by Fed Chair Jerome Powell's remarks at Jackson Hole last week that the "time has come" to cut rates, joining a chorus of Fed policymakers who have signalled the same in recent times.

The prospect of lower U.S. rates next month has toppled the dollar, which had, for the most part of the past two years, been boosted by the Fed's aggressive tightening cycle and expectations of how much higher rates could rise. The greenback has since fallen some 2.9% for the month thus far , putting it on track for its steepest monthly decline in nine months. The dollar index was last at 100.94, steadying from its fall to a 13-month low of 100.51 on Tuesday. In other currencies, the New Zealand dollar ticked up 0.2% to $0.6258, while the yen was last little changed at 144.57 per dollar. It was set to rise 3.7% for the month.

Contrasting with an imminent Fed easing cycle, policymakers at the Bank of Japan have signalled that the central bank would continue to raise interest rates if inflation stayed on course, offering some relief to the Japanese currency which had come under immense pressure owing to stark interest rate differentials. "With the Fed now closer to cutting rates and the BOJ normalising still-negative real policy rates, the USD/JPY should decline closer to its fair value of around 135," said strategists at Lombard Odier in a note.

South African Rand

Reuters: The South African rand weakened on Wednesday ahead of economic data releases towards the end of the week. The rand was at 17.7925 against the dollar by 1533 GMT, about 0.44% weaker than its previous close. The dollar index showing its performance against a basket of currencies was last up about 0.36%. South African investors are awaiting July producer inflation data on Thursday and money supply, trade and budget balance figures on Friday for the latest indications on the health of the domestic economy.

Global market focus this week will be on a preliminary estimate for U.S. gross domestic product in the second quarter and the core personal consumption expenditures index, the U.S. Federal Reserve's preferred inflation measure. The rand, like most emerging market currencies, tends to track international moves as well as local economic events. On the stock market, the Top-40 index closed about 0.74% down. South Africa's benchmark 2030 government bond was weaker, with the yield up 2.5 basis points at 9.14%.

Global Markets

Reuters: Asian shares followed Wall Street futures lower on Thursday as Nvidia's results disappointed some bullish investors, while the dollar steadied and the Treasury yield curve came within a whisker of turning positive. Investors now await U.S. weekly jobless claims, which have gained prominence given the Federal Reserve's focus on the health of the labour market, as well as inflation readings from Germany and Spain, for clues on rate-cut prospects beyond September.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6% as tech stocks dragged. The Nikkei eased 0.4% while South Korea dropped 0.7%. Nvidia's third-quarter revenue forecast of $32.5 billion surpassed Wall Street estimates, but the results still failed to impress the most bullish investors, who have driven a dizzying rally in its shares. Shares of the AI darling slumped 7.6% in after-hour trading, losing about $236 billion of its market value. As a result, Nasdaq futures dropped 1% early in Asia, while S&P futures skidded 0.5%.

Nvidia's chip contractor TSMC slid 2.4% when shares opened, dragging the broader Taiwanese market 1.3% down. "Nvidia, in some ways, has become a victim of its success, its share price soaring over 180% this year and after beating earnings now in 14 of the past 15 quarters," said Tony Sycamore, analyst at IG. "Whether today's results signal the end of investors' strong affinity for the chipmaker remains to be seen. However, at the very least, the post earnings reaction does suggest it's an excellent time to consider diversifying from Nvidia into other chipmakers."

China's blue chips fell 0.4% for a fourth straight day as disappointing results from Chinese companies highlighted the country's frail economic recovery. UBS on Wednesday cut its 2024 GDP growth forecast for China to 4.6% from 4.9%. Chinese battery maker CATL fell 2% after two top Republican lawmakers sought to have the firm to be added to a restricted list of companies allegedly working with Beijing's military. U.S. National Security Adviser Jake Sullivan is wrapping up three days of talks in Beijing intended to ease simmering tensions between the two superpowers.

Chinese food delivery giant Meituan jumped 7% after posting a bigger-than-expected 21% rise in second-quarter revenue. Debt and currency markets were mostly steady in the Asia session. Fed Atlanta President Raphael Bostic said on Wednesday it may be "time to move" on rate cuts, but he wanted to see confirmation from the jobs reports and two inflation reports before the September meeting. The dollar steadied above more than one-year lows, undermined by expectations of imminent Fed rate cuts. Futures have fully priced in a quarter-point cut next month, and even imply a 35% probability of a half-point easing.

The euro held at $1.113, having dropped 0.6% overnight and failed to break major resistance at $1.12. Treasury yields were mixed overnight, but the inverted yield curve between two years and 10 years kept steepening to just within a whisker of turning positive. That would be the first time since July 2022, barring the brief un-inverting during the market crash earlier this month. Two-year yields held at 3.8692%, having slipped 4 basis points overnight, while 10-year yields were little changed at 3.8368%, just 3 basis points below the two years.

Gold climbed again and was just shy of scaling another peak. Gold prices were up 0.4% at $2,512.89 an ounce, just a touch below its record of $2,531.6. Oil edged higher after two straight sessions of declines as concerns about demand from China and the U.S. countered supply disruptions out of Libya. Brent crude futures rose 0.1% to $78.75 a barrel, having fallen more than 3% in the past two days, while U.S. West Texas Intermediate crude futures gained 0.2% to $74.69.

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