The dollar remained strong against the euro on Thursday, pushing the European currency back from a seven-month high. US economic data eased recession fears and reduced expectations of aggressive interest rate cuts. US retail sales rose more than expected in July, indicating that demand remains firm, which could lead markets to adjust their expectations for a 50 basis point rate cut next month.
In addition, fewer Americans than expected applied for unemployment benefits last week, suggesting an orderly slowdown in the labour market, although those laid off are finding it somewhat difficult to get new jobs.
The euro fell 0.36% against the dollar to $1.0973. On Wednesday, it had reached $1.10475, its highest level of the year, as markets digested US inflation figures.
The dollar index rose 0.42% to 103.03, moving away from the eight-month low of 102.15 reached last week.
This morning’s data contradicts the recent narrative of a dramatically lagging Fed that would need to implement massive rate cuts to avoid a recession,’ said Peter Vassallo, currency portfolio manager at BNP Paribas Asset Management. ‘Market prices have adjusted accordingly, and short-term rates in the US have risen significantly today.’
Sterling rose 0.17% to $1.2849 as data showed the UK economy grew 0.6% in the second quarter, in line with economists’ expectations, following a rapid 0.7% recovery in the first quarter of the year.
The pound also strengthened against the euro, which fell 0.53% to 85.38 pence.
Thursday’s US data followed the release of Wednesday’s consumer price index, which rose moderately in July, in line with expectations, and the annual rise in inflation slowed to below 3% for the first time since early 2021.
These figures, along with the slight rise in producer prices in July, suggest inflation remains on a downward trend, although traders now think the Fed will not be as aggressive with rate cuts as expected.
‘This morning’s data all but wiped out remaining bets on a half-percentage-point cut at the Fed’s September meeting,’ said Karl Schamotta, chief market strategist at Corpay.
‘Fears of a ‘hard landing’ for the US economy have all but dissipated,’ he added, ’and Fed officials are expected to respond with a more cautious start to the easing cycle.’
Markets now rate the possibility of a 25 basis point cut next month at 74.5% and the possibility of a 50 basis point reduction at 25.5%, according to CME’s FedWatch tool. Earlier in the week, traders were evenly split between the two options after last week’s massive sell-off.
The yen was trading at 149.13 per dollar, off a seven-month high of 141.675 per dollar reached during last week’s market chaos and well above the 38-year low of 161.96 hit in early July.
Tokyo’s interventions early last month and the Bank of Japan’s surprise rate hike in late July discouraged investors, who abandoned popular carry trades, boosting the yen.
‘Currency markets are experiencing significant volatility, with the dollar rising against its rivals due to a further widening of rate differentials,’ Schamotta said. ‘Rumours of the end of ‘US exceptionalism’ appear to have been exaggerated, yet again.’