The dollar remained stable on Wednesday as traders awaited U.S. inflation data that could influence Federal Reserve policy, amidst a backdrop of geopolitical tension that spurred interest in safer assets such as the Swiss franc. Recent employment figures revealed that the U.S. economy had created significantly fewer jobs over the past year than anticipated, leading to speculation that the Fed may implement a rate cut in the coming week.
Despite the discouraging employment data, which hinted at a potential rate decrease, confidence in the equities market remained intact, with stock prices hovering at record highs. Investors are particularly focused on the possibility of the Fed announcing a substantial half-point rate cut, although immediate effects on the dollar have been limited thus far.
Recent geopolitical events have contributed to investor unease. Israel conducted an airstrike targeting Hamas leaders in Qatar, while Poland intercepted drones that entered its territory amid ongoing Russian maneuvers in Ukraine. This geopolitical turmoil has added layers of uncertainty to the market, as indicated by Jane Foley, head FX strategist at Rabobank, who noted that while the market seems to largely anticipate a Fed rate cut, the unsettling international developments serve as a counterbalance.
The euro remained largely unchanged against the dollar, but it surged by as much as 0.5% against the Polish zloty, marking its most significant daily increase in three months. Expectations surrounding the Fed’s interest rate policy have traders pricing in a quarter-point cut next week, with some speculation for a minor chance of a half-point cut. The forthcoming reports on wholesale and consumer inflation are anticipated to impact expectations regarding the potential for a more aggressive cut.
Analysts caution that the threshold for a 50-basis-point rate cut is considerably high, suggesting that a clear downside surprise in core inflation would be necessary to lend support to such a move. Kieran Williams, head of Asia FX at InTouch Capital Markets, remarked that persistent service prices and the Fed’s inclination for gradual policy changes make a jumbo cut unlikely, though the impending data will shape market sentiment moving forward.
The political landscape in Europe and Japan has also been disrupted, following the resignations of the prime ministers of both countries this week, adding further unpredictability to the economic outlook among some of the world’s wealthiest nations.
In currency movements, the euro experienced minor fluctuations, sitting at $1.1702 after a drop of 0.5% in the previous session. The yen was stable at 147.49 per dollar, while the Swiss franc continued to perform well, trading at 0.798 francs against the dollar, close to a seven-week high.
The dollar index, which gauges the strength of the U.S. currency against a basket of six others, remained steady, despite a 10% decline year-to-date, attributed to erratic U.S. trade and fiscal policies, along with concerns regarding the central bank’s independence. The market showed little reaction to a court ruling that temporarily halted President Trump’s efforts to oust Fed Governor Lisa Cook, a case anticipated to reach the U.S. Supreme Court.
Recent data revealed that the U.S. economy may have added approximately 911,000 fewer jobs over the previous year compared to earlier estimates, suggesting labor market stagnation prior to the implementation of aggressive tariffs on imports by the Trump administration. This report left U.S. rate expectations largely unchanged.
Market analysts predict that if a significant rate cut were to occur, it could yield adverse impacts on market sentiment. Matt Simpson, a senior market analyst at City Index, stated that a 50-basis-point cut could be more damaging than beneficial at this juncture, and that the Fed would likely aim to align its actions with market expectations without resorting to a drastic cut next week. Markets are currently anticipating three cuts over the next three meetings, placing the Fed in a comfortable position to maintain these expectations.
