Major central banks are poised to announce their monetary policy decisions, with the Federal Reserve (Fed) drawing significant attention. The anticipation surrounding a potential resumption of the easing cycle has placed downward pressure on the US Dollar and US Treasury yields, as traders prepare for the US Retail Sales data release.
The US Dollar Index (DXY), which tracks the dollar’s performance against six major currencies, experienced a notable decline of 0.32%, settling at 97.30, close to an eight-week low. Analysts predict that US Retail Sales for August will show a modest increase of 0.3% month-over-month, compared to a previous rise of 0.5%, which could exert additional downward pressure on the DXY. In conjunction with Retail Sales, data on Industrial Production is also on the radar.
In the Eurozone, the EUR/USD pair saw a surge of over 0.26%, surpassing the 1.1750 level. This uptick occurred despite Fitch’s recent downgrade of France’s sovereign credit rating from AA- to A+. European Central Bank (ECB) member Isabel Schnabel noted that interest rates are currently well-positioned as inflation stabilizes around the ECB’s 2% target while the economy remains strong with full employment. Key events to monitor include a speech by ECB’s Escriva, inflation data from Italy, the ZEW Survey for September in Germany and the Eurozone, along with Industrial Production figures across Europe.
In the UK, the GBP/USD climbed above 1.3600 as market participants awaited the release of the jobs data for July. The ILO Unemployment Rate is expected to hold steady at 4.7%. Additionally, attention is focused on the Bank of England’s policy decision scheduled for Thursday.
The USD/JPY pair traded lower as the dollar weakened against most G10 currencies, although the Bank of Japan is expected to raise interest rates later this year. Japanese economic data due for release on Tuesday includes expected improvements in August Exports, projected to contract by -1.9% year-over-year, and a decrease in Imports, anticipated to drop by -4.2% year-over-year.
Meanwhile, the USD/CAD dropped sharply by 0.49%, falling below the 1.3800 mark as investors adjusted their expectations regarding a Fed rate cut and reacted to rising inflation data that edged up to 2%, aligning with the Bank of Canada’s target.
In the commodities market, gold prices continued to reach record highs, with expectations that they may challenge the $3,700 mark throughout the week. This surge in gold is a reflection of market sentiments surrounding a potential 25-basis point rate cut by the Fed. Should gold prices retreat below $3,650, a further decline toward $3,600 may emerge; otherwise, analysts suggest that bullish trends could continue.
As the Fed culminates its policy framework, it reaffirms its dual mandate of achieving price stability and fostering full employment. The primary tool employed to fulfill these objectives is the adjustment of interest rates. When inflation exceeds the targeted 2%, the Fed may raise interest rates, consequently strengthening the US Dollar as it enhances the appeal of US investments. Conversely, in times of low inflation or high unemployment, the Fed has the flexibility to lower rates, which may weaken the dollar.
The FOMC, comprised of twelve Fed officials, convenes regularly to review economic conditions and determine policy direction. Additionally, the Fed has utilized non-standard measures, such as Quantitative Easing (QE), in economic crises to boost credit flow, a strategy that typically weakens the dollar. In contrast, Quantitative Tightening (QT) involves ceasing bond purchases and is generally seen as favorable for dollar strength.
