Dollar holds steady despite rate cut bets; Aussie rises after jobs data

British Pound

Reuters: Sterling was at its strongest against the euro in two-and-a-half years on Wednesday, supported by a relatively hawkish Bank of England and political uncertainty in France and Germany, though it dipped against a strengthening dollar. The euro dropped as low as 82.35 pence, its lowest since March 2022, though was last a fraction stronger on the day at 82.50 pence. More notably, a break past March 2022's 82.035 pence would take the euro to its lowest on the pound since June 24 2016, the day of the outcome of Britain's vote to leave the European Union.

"A little question seems to have popped up over the last few weeks, perhaps amongst the mainstream press, asking whether or not euro sterling could finally go back down to where it was before the referendum in 2016," said Jane Foley, head of FX strategy at Rabobank. "That would be on the back of this perception that the ECB is more growth-oriented - or lack of growth-oriented - and we've got these political issues, clearly in France and in Germany." "We can sit here and quite easily list out what is wrong with the UK economy and what is wrong with the UK budget but at least there is a budget. And given the consensus view that the Bank of England will need to be perhaps more cautious than the ECB, sterling is finding a little bit of support," she said.

The Bank of England is expected to leave rates steady next week and be cautious next year. Markets are pricing just three 25 bp rate cuts by the end of next year. In contrast, the European Central Bank meets Thursday and is expected to cut rates by 25 basis points, and analysts expect the ECB to cut at every meeting at least for the first half of 2025, and possibly beyond. Weak economic growth at the heart of the euro zone is contributing the ECB's dovishness, and there is also politics in the mix.

The collapse of Prime Minister Michel Barnier's government last week left France's 2025 budget in limbo with ministers scrambling to prepare stop gap legislation to roll over 2024 spending limits until a new budget bill can be drafted next year. Germany's governing coalition collapsed last month. It was a different picture for the pound against the dollar, last down 0.34% at $1.2728. The dollar strengthened across the board on Wednesday, as traders feared U.S. inflation data due later in the day could come in hotter than expected and disrupt bets on a Fed rate cut this month.

US Dollar

Reuters: The U.S. dollar traded in a narrow range on Thursday after hitting a two-week high in the previous session, supported by a rise in U.S. Treasury yields even as market players bet the U.S. Federal Reserve will cut interest rates next week. The Aussie dollar surged after Australian employment beat forecasts, while the euro held steady ahead of the European Central Bank's monetary policy decision later in the day. The greenback held on to a hefty portion of the previous day's gains, helped by a rise in U.S. Treasury yields on Wednesday as the Treasury Department sold long-dated supply and data showed a widening U.S. budget deficit.

Wednesday's consumer price index report for November showed a 0.3% rise, the largest gain since April after advancing 0.2% for four straight months. Markets now see a 98.6% probability that the Fed will cut rates by 25 basis points at its Dec. 17-18 meeting, compared with 78.1% a week ago, CME FedWatch tool showed. Market players will get more U.S. inflation data later in the day when the producer price index is published. Unless it shows "strong increases" in categories that feed into personal consumption expenditures, the November CPI data should allow the Fed to go ahead with a cut, said Carol Kong, a currency strategist at Commonwealth Bank of Australia. But the Fed's rate path beyond December is less certain.

"The USD will likely stay bid while concerns about a stall in disinflation underpin current market pricing for a more gradual pace of FOMC rate cuts next year," said Kong. The dollar index, which measures the greenback against six major peers, fell 0.07% to 106.53, not far off a two-week high of 106.81 touched on Wednesday. The dollar eased 0.21% to 152.14 yen after rising to 152.845 yen on Wednesday, its strongest level since Nov. 27. Markets have further trimmed back expectations for a December rate hike from the Bank of Japan after Bloomberg news reported Japan's central bank sees "little cost" to waiting.

Traders also had their eyes on news from China's closed-door Central Economic Work Conference this week, after a Reuters report that China was considering allowing a weaker currency next year had the yuan on the defensive. The Politburo on Monday vowed to switch to an "appropriately loose" monetary policy to spur economic growth. The offshore yuan was last at 7.2735 per dollar, up about 0.10%. The Australian dollar was last up 0.6% at $0.64075, after sliding on Wednesday to $0.63370 for the first time since November 2023.

The kiwi gained 0.29% to sit at $0.58010 after hitting its lowest since November 2022 on Wednesday at $0.57625. The euro traded at $1.0506, up 0.09% ahead of the ECB's monetary policy meeting later today, where it is widely expected to deliver a quarter-basis-point cut. Focus will be on any hints of the central bank's rate path outlook. Sterling was up 0.14% at $1.2768. The Swiss franc traded at 0.88315 per dollar, with markets weighing the prospect of a half-point rate cut on Thursday from the Swiss National Bank. The dollar last fetched C$1.41435 after the Bank of Canada slashed its key policy rate by 50 basis points to 3.25% on Wednesday to help address slower growth.

South African Rand

Reuters: South Africa's rand strengthened on Wednesday after a domestic inflation reading was better than expected and U.S. price data reinforced bets that the U.S. Federal Reserve will cut interest rates next week. At 1525 GMT, the rand traded at 17.74 against the U.S. dollar, about 0.4% stronger than its previous close. South Africa's inflation rate was at 2.9% year on year in November from 2.8% in October, staying just below the central bank's target range after food inflation slowed to its lowest level in almost 14 years.

Economists polled by Reuters had expected inflation of 3.1% in annual terms. "Looking ahead, we expect inflation will continue to edge higher over the coming months. But it is likely to remain contained and stay below the 4.5% target mid-point," said Jason Tuvey, deputy chief emerging markets economist at Capital Economics. Meanwhile, the U.S. consumer price index rose 0.3% last month, the largest gain since April, cementing market expectations of a 25-basis-point cut by the Fed on Dec. 18.

Economists polled by Reuters had forecast the index would rise 0.3%. Separately, South African retail sales rose 6.3% year on year in October after rising by a revised 1.1% in September, data showed. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed about 0.3% lower. South Africa's benchmark 2030 government bond was stronger, with the yield down 4 basis points at 8.93%.

Global Markets

Reuters: Asian stocks gained on Thursday, tracking Wall Street's tech-led rally overnight after an as-expected reading of U.S. consumer inflation cemented bets for a Federal Reserve interest-rate cut next week. Japan's Nikkei topped 40,000 for the first time since mid-October, led by advances in chip-sector shares. The exporter-heavy index also got a boost from a weakening yen, as traders pared bets for a Bank of Japan rate hike next week. The Australian dollar surged after employment data topped estimates by a wide margin, rebounding from Wednesday's weakness following a Reuters report that Beijing is considering allowing the yuan to depreciate further next year. China is Australia's top trading partner and the Aussie is often used as a liquid proxy for the yuan.

The yuan held its ground above a one-week low after the central bank set a marginally stronger official fixing. The tech-heavy Nikkei jumped 1.5% as of 0202 GMT, while the broader Topix climbed 1.2%. South Korea's KOSPI added 0.7%, while Taiwan's benchmark gained 1%. Hong Kong's Hang Seng advanced 0.4%, and mainland blue chips were 0.2% higher. Overnight, the tech-focused Nasdaq shot up 1.8% to close above 20,000 for the first time, while the S&P 500 climbed 0.8%. Futures for both indexes however, pointed to 0.2% declines.

The U.S. consumer price index rose 0.3% last month, the largest gain since April, but exactly as forecast by economists in a Reuters poll and not hot enough to derail Fed officials from normalizing policy, analysts said. "The U.S. CPI print lit a flame in U.S. equity," said Chris Weston, head of research at Pepperstone. "The market has essentially seen one of the last remaining obstacles that could derail sentiment out of the way", he said, "seeing the coast somewhat clearer for the illustrious seasonal chase of returns to play out into year-end."

Traders now lay 97% odds on a quarter-point Fed cut on Dec. 18. The U.S. dollar held firm near a two-week high, boosted by higher Treasury yields as data showing a widening U.S. budget deficit spurred caution on debt. U.S. 10-year Treasury yields rose on Thursday to 4.2828%, the highest since Nov. 27. Major peers the euro and franc were under pressure ahead of expected cuts of as much as half a percentage point at the European Central Bank and Swiss National Bank later in the day.

The U.S. dollar index, which measures the currency against the euro, franc, yen and three other major rivals, was little changed at 106.51 after touching 106.81 on Wednesday for the first time since Nov. 27. The euro ticked up 0.1% to $1.05065 after dipping to a one-week trough overnight. The dollar eased 0.1% to 0.88345 Swiss franc. It slipped 0.2% to 152.11 yen, edging back from a two-week high hit Wednesday on the back of a Bloomberg report that BOJ officials see "little cost" in waiting to hike rates again. Market-implied odds on a quarter-point increase on Dec. 19 last stood at 27%.

The yuan added 0.2% to 7.2670 per dollar in offshore trading. Gold rose to a more than one-month high amid the promise of lower bond yields as the Fed and other major central banks ease policy. It reached $2,725.79 for the first time since Nov. 6 before pulling back to $2,710.45. U.S. crude hovered near a 2 1/2-week peak amid the threat of additional sanctions stifling Russian oil output. U.S. West Texas Intermediate crude futures last traded at $70.20 per barrel, down 9 cents from Wednesday, when it rose as high as $70.53 for the first time since Nov. 25. Brent crude futures eased 3 cents to $73.49 a barrel.

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