Dollar Strengthens as Fed Chair Powell Signals No Urgency for Rate Cuts, Euro and Pound Decline Ahead of Eurozone CPI

The US Dollar has shown signs of stabilization overnight, attempting to recover from recent losses. This rebound was supported by comments from Federal Reserve Chair Jerome Powell, who indicated that the Fed is not in a hurry to implement rapid interest rate cuts. As a result, market expectations for a 50 basis point cut at the upcoming November meeting have decreased significantly, with the probability dropping from 53.3% to 36.7%. Despite this support, the Dollar's momentum remains fragile, prompting investors to closely monitor forthcoming economic data, including today’s ISM manufacturing report, for further guidance.

The Australian Dollar has emerged as the strongest currency this week, buoyed by better-than-expected retail sales figures. Conversely, the New Zealand Dollar has lost some traction, despite a notable improvement in business confidence, allowing the British Pound to surpass it in performance.

On the downside, the Japanese Yen is facing renewed pressure, making it the weakest major currency this week. Diverging opinions within the Bank of Japan (BoJ) regarding the timing of future rate hikes, as highlighted in the latest summary of opinions, are contributing to this uncertainty. Additionally, Japan's Tankan survey has indicated a slowdown in capital investment plans, suggesting potential challenges for the nation's economic outlook.

The Swiss Franc is also struggling, ranking just above the Yen, while the Euro is focused on today’s Eurozone inflation data. Although headline CPI is anticipated to dip below the European Central Bank’s (ECB) 2% target, persistent core inflation may lead the ECB to exercise caution regarding rapid rate cuts.

From a technical perspective, the EUR/GBP currency pair is attempting to resume its recent decline, with a temporary low at 0.8316. A firm break below this level could pave the way for a 100% projection from 0.8624 to 0.8399, targeting the key support level at 0.8201, which represents the 2022 low.

In Asian markets, the Nikkei index is up by 1.47% at the time of writing, while the yield on Japan's 10-year JGB has decreased by 0.007 to 0.850. The Singapore Strait Times has dipped by 0.22%, and both Hong Kong and China are observing a holiday. Overnight, the DOW rose by 0.04%, the S&P 500 increased by 0.42%, and the NASDAQ gained 0.38%. The 10-year yield rose by 0.053 to 3.802.

During a speech at the NABE conference, Powell emphasized that the Federal Open Market Committee (FOMC) is not in a rush to cut rates. He noted that if the economy evolves as anticipated, the Fed could implement “two more cuts” by year-end, reducing the policy rate by an additional half percentage point. Powell reaffirmed that the US economy is on track for a continued slowdown in inflation, which should enable the Fed to reach a neutral interest rate level over time.

“Disinflation has been broad-based,” Powell stated, referencing recent data that indicates progress toward the Fed’s 2% inflation target. However, he stressed that the Fed is not on a predetermined path and will assess risks on both sides of the economy, making decisions on a meeting-by-meeting basis.

In an interview with Reuters, Atlanta Fed President Raphael Bostic expressed expectations for a gradual and orderly easing of monetary policy over the next 15 months. He anticipates the policy rate to fall to a range of 3.00% to 3.25% by the end of 2025, which he considers neutral for the economy. However, Bostic warned that a significantly weaker labor market could accelerate the pace of rate cuts, adding urgency to the Fed’s easing process.

Bostic also highlighted the importance of job growth, stating that as long as the economy continues to create net jobs and monthly job creation stays above 100,000, the labor market is likely to remain stable. This threshold is seen as the minimum needed to accommodate new entrants into the labor force.

Chicago Fed President Austan Goolsbee discussed the Fed's outlook for an extended period of monetary easing in an interview with FOX Business. He noted that the process of normalizing rates will take over a year, with the Fed's latest forecasts suggesting numerous cuts ahead, and policymakers are aligned on this approach.

The Fed has already initiated easing measures, cutting its policy rate by 50 basis points at the last meeting, bringing it to a range of 4.75%-5.00%. Goolsbee refrained from committing to a specific rate cut size for the upcoming November meeting, emphasizing that the overall goal is to return rates to more normal levels.

Additionally, Goolsbee acknowledged cautionary signals in the labor market, though he remarked that the current unemployment rate of 4.2% appears sustainable.

The Summary of Opinions from the BoJ’s meeting on September 19-20 acknowledged that while the outlook for Japan’s economic activity and inflation will guide future changes in monetary policy, policymakers remain vigilant about developments in overseas economies, especially the US, and their potential impact on Japan’s financial markets and price stability.

With the Yen’s depreciation retracing and import price pressures easing, one view noted that the BoJ has sufficient time to assess the situation. Another opinion stressed that Japan’s economy is not at risk of falling behind if interest rates are not raised swiftly, suggesting that the BoJ should avoid raising rates when financial and capital markets are unstable.

However, a contrasting opinion within the BoJ indicated that if economic conditions remain stable and the outlook is confirmed, it would be preferable for the bank to raise rates without undue delay. This divergence highlights the ongoing debate within the BoJ regarding the timing of future rate hikes.

Japan’s Q3 Tankan Large Manufacturing Index remained steady at 13, unchanged from Q2 and in line with market expectations, indicating stability in the manufacturing sector. Manufacturers’ outlook for the next three months improved slightly to 14, signaling cautious optimism about future business conditions.

The Large Non-Manufacturers Index showed a modest rise to 34, up from 33 in June, surpassing expectations of 32. However, the outlook for non-manufacturers over the next three months dipped to 28, reflecting some uncertainty in the service and retail sectors.

Capital spending plans by large companies were revised down, with firms now expecting a 10.6% increase for the fiscal year ending in March 2025, below the median forecast of an 11.9% rise and down from an 11.1% forecast three months ago, indicating a cooling in business investment intentions.

The Tankan survey results will be closely monitored by the BoJ as it prepares for its monetary policy meeting on October 30-31, where it will set new growth and inflation forecasts.

Japan’s Manufacturing PMI for September was finalized at 49.7, slightly lower than August’s reading of 49.8, signaling continued contraction in the sector. According to Usamah Bhatti from S&P Global Market Intelligence, the data reflected muted trends in Japan’s manufacturing industry, with both output and new orders remaining in negative territory, and job creation slowing significantly.

While businesses expressed optimism about output growth over the next 12 months, the level of optimism has softened, marking the weakest positive outlook since the end of 2022. Some manufacturers expressed concerns over the timing of a demand recovery, reflecting caution amid global and domestic uncertainties.

Australia’s retail sales turnover increased by 0.7% month-on-month in August, exceeding the expected rise of 0.4%. Year-over-year, retail sales were up 3.1%, largely attributed to unusually warm weather that boosted spending on items typically associated with spring.

Robert Ewing, head of business statistics at the Australian Bureau of Statistics (ABS), explained that this August was the warmest on record since 1910, leading to increased spending on spring-related items. Categories that saw heightened demand included summer clothing, liquor, outdoor dining, hardware, gardening supplies, camping gear, and outdoor equipment.

The NZIER Quarterly Survey of Business Opinion revealed significant improvement in business confidence in New Zealand during Q3, with a net 5% of firms now expecting deterioration in general economic conditions, a notable improvement from the net 40% expressing pessimism in the June quarter.

Firms continue to face challenges in demand, with a net 31% reporting weaker trading activity. However, looking ahead, only a net 2% of firms expect activity to decline in the next quarter. This shift in sentiment comes as firms anticipate more supportive economic conditions following the Reserve Bank of New Zealand’s decision to begin cutting interest rates in August, with expectations of further reductions in the coming year.

Cost pressures remain, with a slight increase in the proportion of firms reporting higher costs. However, pricing power has diminished significantly, with only a net 3% of firms able to pass on these costs to consumers, compared to 23% in the previous quarter.

In the European session, Swiss retail sales and PMI manufacturing, Eurozone CPI and PMI manufacturing final, and UK PMI manufacturing final will be released. Later in the day, the US ISM manufacturing report will be the main focus.

Intraday bias in USD/JPY has turned neutral as recovery from 141.63 extends. On the downside, a drop below 141.63 will target the 139.57 low, but strong support could emerge from the 139.26 Fibonacci level, potentially leading to a rebound. On the upside, a rise above 146.48 will resume the rebound from 139.57 to the 38.2% retracement level of 161.94 to 139.57 at 148.11. However, a firm break of 139.26 would carry larger bearish implications.

In the broader context, the decline from the medium-term top of 161.94 is viewed as a correction of the overall uptrend from the 2021 low of 102.58. Strong support is anticipated from the 38.2% retracement level of 102.58 to 161.94 at 139.26, which is expected to contain downside pressure, at least on the first attempt. However, the risk will remain on the downside as long as the 149.35 resistance holds. A sustained break of 139.26 would open up the potential for a deeper medium-term decline to the 61.8% retracement level at 125.25.