Dollar Gains on Cut in Rate Expectations, Pound Falls on Inflation

Recent data indicating a resilient economy, combined with slightly higher-than-expected inflation in September, has led market participants to reduce their bets on a sharp cut in U.S. interest rates.

Adding to these expectations on Tuesday were comments from Atlanta Fed President Raphael Bostic, who stated that he anticipated only one more interest rate cut of 25 basis points this year when he updated his forecast for last month’s Fed meeting.

Most market participants expect two more cuts this year, totaling 50 basis points, and traders are currently betting with a 92% probability on a 25-basis-point cut at the next Fed policy meeting on Nov. 7, with an 8% chance of no change, according to CME Group’s FedWatch tool.

In Europe, GBP/USD fell 0.5% to 1.3003 after data revealed that U.K. inflation dipped more than expected in September, setting the stage for a possible rate cut in the coming month.

The U.K. inflation rate dropped to 1.7% year-over-year, down from an estimated 1.9% and from 2.2% the previous month.

This marks the first time it has fallen below the Bank of England’s 2% target since April 2021 and follows earlier data this week showing that U.K. wages grew at the slowest pace in more than two years.

“The data is unambiguously dovish for the Bank of England and paves the way for rate cuts at the remaining two meetings this year (November and December),” ING analysts stated in a note.

“Given Governor Andrew Bailey’s comments earlier this month suggesting that the BoE may accelerate the pace of easing, markets may start to consider the possibility of a 50-basis-point rate cut in November.”

EUR/USD Edges Lower Ahead of ECB Meeting

EUR/USD was down 0.1% to 1.0882 ahead of Thursday’s European Central Bank (ECB) meeting.

The ECB has already cut rates twice this year, and financial markets have almost fully priced in a 3.5% deposit rate cut this week.

“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has reduced the potential for further downside from market influences, but we continue to believe that positioning ahead of the U.S. election may favor a weaker EUR/USD,” ING mentioned.

USD/CNY fell slightly to 7.1179, with the yuan maintaining its losses for the week as sentiment worsened over China’s plans for more stimulus.

China’s Finance Ministry announced a series of fiscal measures to boost growth, although it did not provide specifics on the timing or scale of the estimated measures, raising uncertainty about their effectiveness.

USD/JPY rose 0.2% to 149.43, approaching the resistance level of 150.

Consumer inflation data due later in the week is expected to provide more insight into the Bank of Japan’s plans regarding potential further rate hikes.