Dollar set for weekly gain as traders weigh US rates, yen steady

British Pound

FXStreet: The GBP/USD pair prolongs its corrective decline from a one-year peak, around the 1.3045 region touched earlier this week and drifts lower for the second successive day on Friday. Spot prices drop to the 1.2935-1.2930 area, or a fresh weekly low during the Asian session amid some follow-through US Dollar buying, albeit lack bearish conviction. Concerns over a renewed trade war between the US and China, along with persistent geopolitical tensions, temper investors' appetite for riskier assets.

This led to the overnight slump in the US equities and led to a downfall across Asian markets, which assists the safe-haven buck to build on its recovery from nearly a four-month low and acts as a headwind for the GBP/USD pair. That said, dovish Federal Reserve expectations might hold back the USD bulls from placing aggressive bets and lend some support to the currency pair. Market participants now seem convinced and are pricing in a 100% chance that the US central will begin its rate-cutting cycle in September.

The bets were reaffirmed by the US Initial Jobless Claims data released on Thursday, which pointed to a loosening labour market. This comes on top of ebbing inflation and sets the stage for the Fed to start lowering borrowing costs. In contrast, investors have been pricing out the possibility of a rate cut by the Bank of England in the wake of Wednesday's higher-than-expected UK CPI print. Apart from this, a better-than-anticipated UK GDP growth of 0.4% in May might continue to underpin the British Pound and contribute to limiting losses for the GBP/USD pair.

Traders now look forward to the release of UK monthly Retail Sales data for a fresh impetus. Later during the North American session, speeches by influential FOMC members will drive the USD demand and produce short-term trading opportunities. Nevertheless, spot prices, for now, seem poised to register weekly losses for the first time in the previous four.

US Dollar

Reuters: The dollar was poised to snap a two-week losing streak on Friday as traders pondered the U.S. rates outlook, while the yen was steady after inflation in Japan accelerated for second month in a row, keeping the prospect of a rate hike there on the table. The U.S. dollar was on the front foot in Asian hours after a stormy week that saw the yen, euro and sterling make significant gains against the greenback as investors fully price in a rate cut from the Federal Reserve as soon as September.

The yen was at 157.35 per dollar after touching a six-week high of 155.375 on Thursday in the wake of suspected interventions by Tokyo last week that could total nearly 6 trillion yen ($38.14 billion), according to data from the Bank of Japan. Data on Friday showed core consumer prices in Japan rose 2.6% in June, keeping alive market expectations that the central bank could soon raise interest rates. The BOJ exited negative rates and bond yield control in March, in a shift away from a decade-long radical stimulus programme, with markets warming to the idea of a rate hike at its meeting at the end of the month. Traders are pricing in a 41% chance of a 10 basis point hike.

The yen has fallen more than 10% against the dollar this year, weighed down by the wide difference in interest rates between the U.S. and Japan and languished around 38-year lows at the beginning of the month, spurring suspected moves by Tokyo. "While suspected interventions do not seem to stabilize the yen, we believe monetary policy might," said Krishna Bhimavarapu, APAC economist at State Street Global Advisors. "The time is coming for decisive action from the BoJ, and today's higher inflation has only made it more plausible."

In the U.S., data showed the number of Americans filing new applications for unemployment benefits rose more than expected last week, though there was no material shift in the labour market. The dollar index, which measures the U.S. currency against six rivals, was 0.1% higher at 104.24, up from a four-month low of 103.64 it touched on Wednesday. The index is set for a 0.17% gain for the week after two weeks of losses. The Fed is scheduled to meet at the end of July, when markets anticipate a very low chance of the central bank cutting rates. Traders are pricing in 62 basis points of easing this year.

"I think there's a lot of different crosswinds and tug of war that markets are facing right now," Michael Wan, senior currency analyst at MUFG, referring to rising bets of the Fed cutting rates coming at the same time investors are bracing for a potential victory by Republican presidential candidate Donald Trump. Markets have reacted to the prospect of a Trump presidency by pushing the dollar higher and positioning for a steeper Treasury yield curve. Meanwhile, the euro was little changed at $1.08880 after a 0.4% drop in the previous session as the European Central Bank kept rates steady and gave no insight into its next move.

The single currency had touched a four-month high of $1.0947 on Wednesday, recouping all the losses of the past few weeks when it came under pressure from uncertainty about the French election. Sterling was last flat at 1.2941 after a 0.5% slide in the previous session as data showed wages in Britain grew at a slower pace, but was still strong enough to keep doubts about a rate cut from the Bank of England afloat. In other currencies, the Australian dollar eased to $0.6702, while the New Zealand dollar was 0.26% lower at $0.60295. The Aussie and the kiwi were set for a more than 1% drop for the week as a high-level meeting in China failed to yield any forceful stimulus steps and the popular carry trades using the yen as funding currency unwound.

South African Rand

Reuters: South Africa's rand was stable on Thursday after the South African Reserve Bank kept its main interest rate unchanged for the seventh meeting in a row. The decision by the central bank's Monetary Policy Committee was split, with four members preferring the current rate of 8.25% and two favouring a 25-basis-point rate cut. At 1431 GMT, the rand traded at its previous close of 18.1950 against the dollar. Monetary policy has remained tight in Africa's most industrialised economy as the central bank tries to steer inflation back towards the midpoint of its 3%-6% target range.

Consumer inflation stood at 5.2% year on year in May, the latest month for which data is available, the same as in April. June data will be released next week. The SARB reduced its headline inflation forecast for 2024 to 4.9% from 5.1%. In lowering its inflation forecast, the central bank has acknowledged the positive market reaction to the election, the lower risk perception of the country and the reduced need to protect the rand from speculative bets, said Danny Greeff, co-head of Africa at ETM Analytics. "All-in-all, there was not much for the market to trade on today," Greeff added.

Investor focus will shift to a speech by President Cyril Ramaphosa on Thursday evening in Cape Town, when he is expected to outline the priorities of the newly formed broad coalition government. On the stock market, the Top-40 index was slightly stronger at 0.15%. South Africa's benchmark 2030 government bond was weaker, as the yield gained 4.5 basis points to 9.645%.

Global Markets

Reuters: Asian shares are set to end the week on a sour note, as uncertainty across major economies added to headwinds for investors even as the global rate easing cycle gets under way. It has been a turbulent week in markets, with a tech sell-off sparked by deepening Sino-U.S. trade tensions, uncertainty over U.S. President Joe Biden's fate in the presidential race, disappointing Chinese economic data and a lacklustre third plenum outcome casting a shadow over the global mood. In the foreign exchange market, Tokyo's recent bouts of intervention also kept traders on edge. "We could just be getting a taste of things to come. And that is more turbulence," said Matt Simpson, senior market analyst at City Index.

MSCI's broadest index of Asia-Pacific shares outside Japan slid 1.56% and was headed for its worst week in three months with a nearly 3% loss. Japan's Nikkei fell to a more than two-week low and was last down 0.09%, extending its sharp 2.4% fall from the previous session. The Nikkei was on track to lose 2.7% for the week, also its steepest weekly decline in three months. European shares looked set for a mixed start, with EUROSTOXX 50 futures up 0.08%, while FTSE futures fell 0.4%. S&P 500 futures tacked on 0.16%, while Nasdaq futures gained 0.3%. Technology stocks continued to struggle, with South Korea's tech-heavy KOSPI index and Taiwan stocks both falling 1.5% and 2%, respectively.

South Korean chipmaker SK Hynix slid more than 1%, though Japan's Tokyo Electron, a chip making equipment manufacturer, rebounded some 2.5%, after an 8.75% tumble on Thursday. Shares of Taiwan's TSMC, the world's largest contract chipmaker, fell 2.7%, even after the company posted better-than-expected earnings on Thursday and raised its full-year revenue forecast. In China, investors were left disappointed over the lack of details provided on the implementation steps for achieving economic policy goals at the conclusion of its closely watched plenum on Thursday.

Chinese officials on Friday acknowledged that the sweeping list of economic goals contained "many complex contradictions", pointing to a bumpy road ahead for policy implementation. Chinese blue-chips were last a touch higher, though the CSI300 Real Estate index slid more than 2%, as an anaemic property sector continued to weigh on China's growth outlook. The Shanghai Composite Index edged 0.08% lower, while Hong Kong's Hang Seng index fell 2.1%. "Apart from very broad-brush platitudes devoid of stimulus, economic policy references of quality over quantity may also imply willingness to stomach slower overall growth," said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank.

The onshore yuan was weaker on the day at 7.2666 per dollar. The euro was last 0.08% lower at $1.0887, having fallen 0.4% in the previous session after the European Central Bank kept rates on hold as expected but left the door open to a September cut as it downgraded its view of the euro zone's economic prospects. "The policy statement gives little away, offering no meaningful changes from June - continuing to stress a data-dependent approach to policy setting," said Nick Rees, FX market analyst at MonFX. "We still think that a September cut remains the base case."

The dollar was meanwhile on the front foot, distancing itself from a four-month low hit earlier in the week against a basket of currencies. Sterling dipped 0.05% to $1.2939, while the Australian dollar fell 0.12% to $0.6698. The dollar was partially underpinned by strong U.S. manufacturing data and jobless figures that did little to suggest a significant slowing in the labour market, though traders are still pricing in a September rate cut from the Federal Reserve. The yen fell 0.1% to 157.55 per dollar, though was headed for a slight weekly gain, helped by suspected bouts of intervention from Japanese authorities to prop up the currency and as an acceleration in the core inflation last month kept alive expectations that the Bank of Japan could soon raise interest rates.

In commodities, oil prices fell. Brent crude futures eased 0.46% to $84.72 a barrel, while U.S. crude futures slid 0.59% to $82.33 per barrel. Gold fell 0.8% to $2,424.93 an ounce, retreating from a record high hit earlier this week on the prospect of lower global interest rates.

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