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Federal Reserve (Fed) Bank of San Francisco President Mary Daly noted on Tuesday that although the Fed has made significant progress on tamping down inflation while also keeping the US labor market within long-run averages, there's still a lot of progress to be done. The Fed policymaker also leaned into the current rate cut spread, noting that it was likely the Fed will only see one or two more rate cuts in 2024.

Key highlights

Federal Reserve Bank of San Francisco President Mary Daly said on Wednesday that she "fully" supported the Fed's half of a percentage-point interest-rate cut last month. Daly further stated that one or two more rate cuts this year are likely if the economy evolves as she expects, per Reuters.  

Key quotes

Market reaction 

The US Dollar Index (DXY) is trading 0.01% lower on the day at 102.90, as of writing.

The main event in the Central and Eastern Europe (CEE) region today is the meeting of the National Bank of Romania, ING’s FX strategist Frantisek Taborsky notes.

EUR/RON remains firmly anchored just below 5.00

“Our economists expect rates to remain unchanged at 6.50%, in line with expectations, but the survey is split. On one side is the rebounding credit market, wages and loose fiscal policy speaking against further rate cuts. On the other, inflation is lower than expected and the economy is surprising on the negative side.”

“The global picture is also mixed with the Fed cutting rates and the situation in the Middle East pushing up oil prices. FX forwards suggest a market on the dovish side for today's decision. However, it's hard to expect any reaction from the RON which remains firmly anchored just below 5.00 EUR/RON and we don't expect any changes here in the near term.”

“At least the front of the Romania government bond curve could see some support if the NBR continues to cut rates for the third straight time. On the other hand, in the bond space, the focus remains mainly on fiscal policy. Speculation yesterday of the Ministry of Finance's agreement with the European Commission on this year's deficit at 7.9% of GDP can hardly be taken as good news, given that it is more at the upper end of market expectations, implying further bond issuance this year.”

• USD/CAD falls slightly ahead of the Fed Powell’s speech.
• Investors look for fresh interest rate cues for the November meeting.
• The Canadian economy is estimated to have barely grown in July.

The USD/CAD pair edges lower to near 1.3465 in Thursday’s European session after a strong recovery on Wednesday. The Loonie asset faces a mild sell-off as the US Dollar (USD) struggles to extend recovery, with the US Dollar Index (DXY) facing pressure near 101.00.

The next move in the US Dollar will be guided by Fed Chair Jerome Powell’s speech at 13:20 GMT in which he is expected to provide fresh guidance on interest rates. In last week’s press conference after the policy decision of interest rate reduction by 50 basis points (bps) to 4.75%-5.00%, the comments from Jerome Powell suggested that the larger-than-usual rate cut will not be the new normal.

On the contrary, the probability of the Fed delivering another 50 bps interest rate cut in November is 61%, higher than 39% a week ago, according to the CME FedWatch tool.

Meanwhile, the Canadian Dollar (CAD) will be influenced by the monthly Gross Domestic Product (GDP) data for July, which will be published on Friday. Economists estimate the Canadian economy to have grown by 0.1% after remaining flat in June.

USD/CAD prints a fresh swing low near 1.3400 on a daily timeframe, suggesting a firm bearish trend. The Loonie asset weakens after slipping below the August 28 low of 1.3440. A declining 20-day Exponential Moving Average (EMA) near 1.3545 indicates more downside.

The 14-day Relative Strength Index delivers a range shift move into the 20.00-60.00 territory from 40.00-80.00, which suggests that pullbacks would be considered as selling opportunities by investors.

Going forward, a further correction by the major below the immediate support of 1.3400 would expose it to January 31 low of 1.3360 and June 9 low of 1.3340.

In an alternate scenario, a recovery move above the psychological support of 1.3500 would drive the asset towards April 5 low of 1.3540, followed by September 20 high of 1.3590.

USD/CAD daily chart

Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.

Key quotes

"Immigration is one of the things that has allowed unemployment rate to rise."

"Further declines in job openings will translate more directly into unemployment."

"My own sense is we are not going back to negative rates for long-term bonds; it feels neutral rate is higher than it was."

"It feels to me that neutral rate is probably significantly higher than it was pre-pandemic."

"Fed makes decisions based on its service to American people."

"Our decisions are never about politics or anything else."

"Our job is to support the economy on behalf of the American people."

"If we get it right, will benefit the American people."

Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.

Key quotes

"It is time to calibrate our policy to something that is more appropriate given progress on inflation and on employment."

"The direction of our process is toward a sense of neutral."

"We'll move as fast or as slow as we think appropriate."

"We left open size of rate cut as we entered blackout."

"Broad support for a 50 bps cut today."

"There is a dissent and a range of views but also a lot of common ground."

"There's no sense that the Committee feels it is in a rush."

"We have made a good strong start today on cuts."

"I am very pleased that we did 50 bps."

While the Fed’s guidance and policy decision tomorrow will signal whether the selloff in the USD over the past few sessions is overdone, the US election will set the scene for the greenback into year-end and through the start of the new year, Rabobank’s Senior FX Strategist Jane Foley notes.

The 1.12 level to be tough resistance for EUR/USD

“The inflation impulse is expected to be greater under a Trump presidency given his preference for more tariffs and his desire to make permanent most of the tax cuts he enacted during his first term. Looser fiscal conditions suggests that the Fed easing cycle could come to an abrupt halt next year.”

“Rabobank expects that a Harris election victory would allow for a more extended series of Fed rate cuts which would imply a softer profile for the greenback then under a Trump presidency. That said, the outlook for the USD crosses also depends on the relative performance of other currencies. It is hoped that this week’s BoJ policy meeting will offer some sense of the timing of further BoJ rate hikes.”

“In view of the contrasting BoJ and Fed policy directions, we continue to favour selling USD/JPY on rallies. By contrast the direction of interest rate policy at the ECB is the same as the Fed. Since it could be argued that a sharp rise in the value of the EUR vs. the USD could allow the ECB to step up the pace of its easing, we expect EUR/USD 1.12 to be tough resistance.”

The ECB is almost certain to cut rates by 25bp next week. While the central bank is set to refrain from any firm guidance on future steps, we think staff forecasts showing inflation at target in the medium-term support a quarterly pace of rate cuts, Nordea’s economists Jan von Gerich and Tuuli Koivu note.

ECB is set to deliver another 25bp rate cut

“The ECB is set to deliver another 25bp rate cut, and we expect the communication to be in line with our view of continued quarterly rate cuts. No clear signals about the timing of further policy steps should be expected.”

“The staff inflation forecast for the near-term will likely see small upward revisions, while the medium-term numbers are set to point to inflation stabilising around the two per cent target. Financial markets could see somewhat dovish moves on any soft-sounding comments from Lagarde.”

The only event on the CEE calendar today is the National Bank of Poland (NBP) meeting. In line with the market, we expect rates to be unchanged at 5.75% with little room for surprises. However, the statement following the decision may reveal some hints, but the main focus will be on the Governor's press conference tomorrow, ING’s FX strategist Frantisek Taborsky notes.

Governor Glapiński sounds exceptionally hawkish

“After July’s decision, Governor Glapiński sounded exceptionally hawkish, stating that rates might need to stay unchanged until 2026. Other policymakers suggested rate cuts should start earlier, while government measures to prevent high energy prices next year should mean the inflation path is more favourable than the NBP thought in June.”

“More recently, Glapinski realised that there is probably sufficient support in the Council to discuss rate cuts in 2025 and amended his wording accordingly, surprising markets with his less-hawkish policy stance. Our economists still expect the first cut in the second quarter of 2025 and think that rates could fall by 100bp next year, especially if the energy shield is not fully withdrawn.”

“The markets are more on the dovish side with the first fully priced-in rate cut in January, which on the other hand is still within the range of possible scenarios if inflation and economic recovery surprise to the downside. It's not that long ago though when the markets were pricing in earlier rate cuts, and if the governor hints at a dovish turn, the market would be happy to move in that direction. FX on the other hand lost ground yesterday, as did the entire CEE region, but is on the stronger side in the medium term and should remain there, in our view.”

• USD/JPY is stuck moving sideways on the 4-hour Chart used to analyze the short-term trend. 
• It needs to break higher or lower to confirm directionality – otherwise it will continue oscillating. 

USD/JPY has been trading in a messy range all through August with little clear direction. 

The pair is likely in a “sideways” trend therefore, which will probably continue until a breakout in one direction or another confirms a directional trend. 

USD/JPY 4-hour Chart

A break above 146.91 would provide a sign that bulls are getting the upper hand and probably lead to a move up to 147.85, then perhaps the August highs at around 149.39. 

To the downside, a break below 143.45 (August 26 low) would confirm more downside, probably to around the 141.70s where the August lows are. 

The Moving Average Convergence Divergence (MACD) is above its signal line and rising, supporting a very mildly bullish outlook, although it has not quite broken above zero yet, so it remains unconfirmed.

There is quite a popular view out there that with 100bp of Fed cuts priced by the end of this year and a terminal rate already priced at 3.00%, the dollar does not need to fall much further. Equally, however, we do not see the need for the dollar to rally too much either. And for the time being we are treating this week's dollar price action as bearish consolidation after the relatively sharp 5% fall since the start of July, ING’s FX strategist Chris Turner notes.

Dollar’s bearish holding pattern continues

“What gives us some comfort that this is a broad USD decline is the fact that the Asian FX laggards - including the Korean won - are all participating in the move. Even the Korean options market is showing the one-month risk reversal in favour of Korean won call options - something that rarely has been seen since 2007. Whether this represents investors rebalancing underweight Asian portfolios or Asian exporters catching up on some overdue dollar hedging remains to be seen.” 

“As we have discussed recently, we will probably need to get some more downside surprises on US activity data to get the dollar bear trend moving again. That may not be the case where the calendar only shows revisions to second-quarter GDP data and the weekly initial claims. The latter seems resolutely stuck near the 235,000 area as broad job lay-offs are yet to emerge.”

“Yet these should rise at some point and Chair Powell's speech last Friday did sound a little nervous as to the speed with which the labour market was deteriorating. Expect DXY to stay relatively range-bound, and only a move above the 101.60/65 area would suggest we are seeing something more than bearish consolidation.”

• USD/CAD hovers near 1.3600, the potential breakdown region of the Broadening Triangle chart pattern.
• Investors keenly await Fed Powell’s speech at the JH Symposium.
• The Canadian Dollar will dance to the tunes of the monthly Retail Sales data for June.

The USD/CAD pair falls back below 1.3600 after a short-lived pullback move to near 1.3616 in Friday’s European session. The Loonie asset weakens as the US Dollar (USD) struggles to hold Thursday’s recovery move, driven by better-than-estimated preliminary United States (US) S&P Global PMI for August.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near 101.30. The Greenback is expected to remain on the sidelines, with investors focusing on the Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium.

In the JH event at 14:00 GMT, Jerome Powell is expected to provide fresh guidance on interest rates and the economic outlook. The Fed is widely anticipated to start reducing its key borrowing rates from the September meeting but traders are split over the likely size of interest rate cuts.

Meanwhile, the Canadian Dollar (CAD) will be influenced by the domestic monthly Retail Sales data for June, which will be published at 12:30 GMT. The Retail Sales data, a key measure of consumer spending that prompts inflationary pressures, is estimated to have declined consequently. The consumer spending measure is expected to have contracted by 0.3% after dropping 0.8% in May.

Lower sales at retail stores point to a decline in the purchasing power of households, which would prompt expectations of more Bank of Canada’s (BoC) interest rate cuts this year.

USD/CAD is on the verge of delivering a breakdown of the Broadening Triangle chart formation on a daily timeframe. The asset hovers near the horizontal support of the above-mentioned chart pattern below 1.3600.

The overall trend is bearish as it trades below the 200-day Exponential Moving Average (EMA), which trades around 1.3630.

The 14-day Relative Strength Index (RSI) oscillates in the bearish range of 20.00-40.00, suggesting a firm downside momentum.

More downside would appear if the asset breaks below April 9 low of 1.3540. This would drag the asset towards the psychological support of 1.3500, followed by March 21 low of 1.3456.

In an alternate scenario, a recovery move above August 12 high of 1.3750 would drive the asset toward the round-level resistance of 1.3800 and April 17 high near 1.3840.

USD/CAD daily chart

A persistent selling bias kept the Greenback’s price action subdued for yet another session, a view that was bolstered by further confirmation of the downward path of US inflation, as per July’s CPI data.

Here is what you need to know on Thursday, August 15:

The USD Index (DXY) dropped to multi-day lows near 102.30 on the back of persevering US disinflationary pressures. A busy US calendar on August 15 will feature Retail Sales, the Philly Fed Manufacturing Index, usual weekly Initial Jobless Claims, Industrial Production, the NAHB Housing Market Index and Net Long-term TIC Flows. In addition, the Fed’s Musalem and Harker are due to speak.

EUR/USD rose further and hit new 2024 tops around 1.1050 on the back of further weakness in the Greenback. There will be no data releases on the euro docket on August 15.

GBP/USD came under pressure as market participants started to pencil in around 50 bps of easing by the BoE following the UK CPI readings. The GDP Growth Rate, Balance of Trade results, Construction Output, Industrial Production, Manufacturing Production, and the NIESR Monthly GDP Tracker are all due on August 15.

USD/JPY alternated gains with losses near the 147.00 region amidst the broader consolidative range. The GDP Growth Rate takes centre stage on August 15, seconded by weekly Foreign Bond Investment, and final Industrial Production.

AUD/USD gave way some gains and set aside two consecutive daily advances aoon after hitting tops near 0.6650. The Consumer Inflation Expectations, and the publication of the jobs report are all due on August 15.

WTI prices broke below the $78.00 mark per barrel to clinch their second straight day of losses on the back of easing geopolitical jitters and demand concerns.

Prices of Gold receded to two-day lows near $2,440 per ounce troy as investors reassessed the Fed’s rate path. Silver prices retreated to four-day lows near $27.20 per ounce following the broad-based weakness in the commodity complex and Chinese concerns.

• The US Dollar on the backfoot ahead of US CPI for July later on Wednesday.
• Massive risk-on on Tuesday crushed the Greenback across the board. 
• The US Dollar index trades in the mid-102.00 range and could trade in another ballpark by the closing bell. 

The US Dollar (USD) trades lower again, as measured by the US Dollar Index (DXY), in the European session on Wednesday following a 0.50% decline a day before. The US Dollar snapped under pressure after a massive wave of risk-on pushed US equities higher and sent US yields lower on Tuesday. The biggest reason for that move was weaker Producer Price Index (PPI) data on all fronts and segments in July, which hypes up the upcoming consumer inflation number with elevated expectations of coming in softer than expected. 

On the economic data front, the US Consumer Price Index (CPI) for July will be key on Wednesday. If the PPI data from Tuesday holds any relevance, traders will want to gear up for some volatility going into the US CPI number. Ahead of the US data, Europe will release the preliminary Gross Domestic Product (GDP) for the second quarter, which might also move the US Dollar Index.   

Daily digest market movers: CPI ahead of Jackson Hole

• Japan must seek a new prime minister as Fumio Kishida does not want to run for a second term.
• The Royal Bank of New Zealand (RBNZ) surprised the market with a 25 basis point interest rate cut during the Asian session on Wednesday and the message that the cutting cycle has started. RBNZ Chairman Adrian Orr even said that a 50 basis point cut was on the table for this meeting. A comment that sent the New Zealand Dollar 1% lower against the US Dollar. 
• At 11:00 GMT, the Mortgage Bankers Association (MBA) will release its weekly Mortgage Applications Index for the week ending August 9. The previous week, it was up 6.9%
• At 12:30 GMt, the US consumer inflation data for July will be released:
  • Headline monthly CPI inflation is expected to rise by 0.2% in July following the -0.1% the month before. The yearly benchmark is expected to remain at 3.0%.
  • Core monthly CPI inflation is expected to increase by 0.2% after the 0.1% in June. The yearly gauge is expected to soften to 3.2% from 3.3%.
• Equity markets are rallying higher in Japan based on the political news that a new prime minister needs to be found. The Topix trades up over 1%, while the Nikkei lags by 0.4%. European equities are up less than 0.5%, while US futures are flat, awaiting the US CPI release. 
• The CME Fedwatch Tool shows a 47.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 52.5% chance for a 50 bps cut.  Another 25 bps cut (if September is a 25 bps cut) is expected in November by 31.5%, while there is a 50.8% chance that rates will be 75 bps below the current levels and a 17.7% probability of rates being 100 basis points lower. 
• The US 10-year benchmark rate trades at 3.84% and slips further away to fresh lows for this week.

US Dollar Index Technical Analysis: Not going quietly

The US Dollar Index (DXY) has moved away from the crucial 103.18 pivotal level following the surprise PPI release on Tuesday. From a technical perspective, a slide below 103.00 suggests more downside should be at hand. The DXY will need to decline further, pulling the Relative Strength Index (RSI) into oversold to see ample support and sending it back up towards 103.00.

A two-tiered recovery can be taken away from the charts, with the first resistance(yes, again, the same level we have been talking about since last week) at 103.18, where the DXY has been unable to hold above in recent days. Once bulls can hold that level and move away from it, 104.00 comes into play. However, further upside is limited as the 200-day Simple Moving Average (SMA) at 104.12 will throw a spanner in the works in the near term. 

On the downside, the oversold condition in the Relative Strength Index (RSI) indicator has eased in the daily chart and holds room for a small leg lower. Support nearby is the August 5 low at 102.17. Once through there, pressure will start to build on 102.00 as a big psychological figure before testing 101.90, which was a pivotal level in December 2023 and January 2024.

US Dollar Index: Daily Chart

Interest rate in Australia is expected to remain unchanged in August.  

Reserve Bank of Australia Governor Michele Bullock speech could shed light on the Board's path.  

The Australian Dollar under pressure ahead of the verdict. 

The Reserve Bank of Australia (RBA) will announce its monetary policy decision on Tuesday, August 6. The central bank is expected to maintain the Official Cash Rate (OCR) unchanged at 4.35% amid stubbornly high inflation. Following the announcement, Governor Michele Bullock will hold a press conference in which she will likely explain the reasons behind the decision and, luckily, offer some hints on what policymakers may do next.

Ahead of the announcement, the Australian Dollar (AUD) is under strong selling pressure amid risk-aversion. Financial markets are all about central banks these days, with mounting hopes the United States (US) Federal Reserve (Fed) will begin loosening monetary policy as soon as September. Even further, market participants are pricing in the US central bank kicking off the new cycle by cutting interest rates by 50 basis points (bps).

Reserve Bank of Australia expected to extend the pause, but what’s next?

But fears are not just because of the Fed. The Bank of Japan (BoJ) is also in the eye of the storm these days as policymakers have finally moved into a more aggressive tightening. The BoJ decided to raise the near-term rate target by 15 bps to 0.15%-0.25% when it met last week, also announcing they would reduce their monthly bond buying by around ¥400 billion each quarter. The decision came after the Japanese Yen (JPY) plummeted to multi-year lows against the US Dollar and was clearly a decision to support the local currency rather than a measure related to inflation.

Back to the RBA, policymakers will likely discuss either holding or hiking, with a rate cut out of the table. When the Board met last June, it noted that the case for a rate rise “could be further strengthened” if supply in the economy was “likely to be more constrained than had been assumed,” and moreover, considering “productivity growth remained very weak.”

Australia reported inflation data last week, and the news were far from good. According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 1.0% in the second quarter of the year and 3.8% over the twelve months to the June 2024 quarter. The latter came in line with the market expectations but higher than the 3.6% posted in the first quarter of the year. 

Meanwhile, the RBA Trimmed Mean CPI, the central bank’s favorite inflation gauge, rose 0.8% QoQ and at an annualized pace of 3.9% in the three months to June, slightly below expected. Finally, the Monthly CPI rose by 3.8% YoY in June, below the previous 4% but still above the RBA’s goal of 2% - 3%. 

Australian inflation is not at a point to trigger a rate hike, but given the latest data, the odds for a rate cut are pretty much null. 

How will the RBA interest rate decision impact AUD/USD?

Ahead of the announcement, market players are anticipating a “hawkish hold.” Policymakers will likely keep the OCR at  4.35% for a sixth straight meeting on Tuesday and refrain from discussing rate cuts but instead maintain the focus on persistent inflationary pressures and leave the door open for a potential hike.

Governor Michele Bullock and co will probably reiterate that they need to be confident that price growth is moving sustainably back to the central bank’s inflation goal and that, in such a scenario, they are not ruling anything in or out. 

If that’s the case, the AUD could find some near-term strength, although it should be short-lived, given the risk-averse environment and the decision matching expectations. A dovish stance, however, will come as a big surprise and could trigger a massive Aussie sell-off. 

The AUD/USD pair trades around 0.6450 ahead of the event and after plummeting to 0.6347 at the beginning of the week amid mounting tensions in the Middle East and central banks’ imbalances.

Valeria Bednarik, FXStreet's Chief Analyst, says, “The AUD/USD pair is extremely oversold, yet there are no technical signs of downward exhaustion. However, the accumulative 350 pips slump and the expected hawkish hold from the RBA could help the pair correct higher. The immediate resistance level is the 0.6500 - 0.6520 price zone, with gains beyond the latter unlikely unless a hawkish surprise. In such a scenario, AUD/USD could surge towards 0.6570.” 

Bednarik adds: “A break through the 0.6400 mark should lead to a retest of the aforementioned low at 0.6347, moreover if risk aversion continues to dominate financial boards ahead of the announcement. A test of the 0.6300 mark is on the cards, should the latter give up.” 

Federal Reserve Chairman Jerome Powell explains the decision to leave the policy rate, federal funds rate, unchanged at the range of 5.25%-5.5% and responds to questions in the post-meeting press conference.

Key takeaways

"Total scope of data suggest normalizing labor market."

"Job vacancies are still high by historical standards."

"Can't look to history as a guide to future."

"The picture is not one of a really bad economy, just spots of weakness."

"We don't change our approach according to political calendar."

"We never use our tools to support or oppose a politician or party."

"If we stick to our part, it benefits all Americans."

"That's what we believe and is how we always operate."

"Anything we do before, during or after election will be based on data, outlook and risks."

"We are a non political agency."

"We would never try to make policy decisions based on the outcome of an election that hasn't happened yet."

"There are always meaningful differences of views on FOMC."

Thursday was a bit puzzling. Due to concerns about the current state of the US consumer and general uncertainty about the state of the global manufacturing sector, uncertainty had spread to the currency markets in recent days, Commerzbank FX strategist Volkmar Baur notes.

US GDP figure turns the market upside-down

“The JPY and CHF were in demand, while the EM currencies were less so. And then everything took a turn at 2:30 p.m. (MEST) when the US GDP figures were released. It is generally assumed that markets look ahead and price in expectations, and then a backward looking number causes a reversal. Admittedly, consumer spending came in slightly above expectations at 2.3%.”

“However, it should also be noted that the positive surprise in overall GDP growth (2.8% vs. 2.0% expected) was nearly entirely due to inventory accumulation, which added 0.8 percentage points to growth. Anyway, yesterday was enough to change the mood of the market. However, in my opinion, caution is certainly required.”

“Yesterday's figures did not really put an end to concerns about the US consumer and the manufacturing sector. And next week, we have a number of data points on the calendar (US payrolls, global manufacturing PMIs, just to name the most important) that could rekindle these concerns.”