- Market participants expected a more hawkish tone from the Bank of Japan.
- The dollar remained vulnerable after the Fed cut rates by 50-bps.
- The pound went against the trend, rising after upbeat retail sales data.
Most currency futures fell on Friday as the US dollar rebounded after an unexpectedly cautious Bank of Japan policy meeting. Meanwhile, the pound remained an outlier as UK data revealed better than expected sales figures.
Japanese Yen (Source: Bloomberg)
Market participants expected a more hawkish tone from the Bank of Japan. Before the meeting, policymakers had voiced their support for more rate hikes. However, during the meeting, there was little talk on rate hikes. Instead, BoJ Governor Ueda focused on the economy. As a result, the yen collapsed, allowing the greenback to climb.
This rally in the dollar affected most currency futures. Although Ueda gave no clear signal on future hikes, he noted that consumption in Japan was on the rise. Increased demand supports the outlook for more hikes. Economists expect at least one increase in rates before the year ends.
The dollar recovered from its lows but remained vulnerable after the Fed cut rates by 50-bps on Wednesday. After waiting since the year began, the US central bank started its easing cycle with a massive cut. Economists had expected a 25-bps reduction. The surprise cut weakened the dollar against its peers. Furthermore, it showed confidence among policymakers that they had finally tamed stubborn inflation. As a result, markets are pricing a 49% chance of another super-sized cut in November.
The Fed’s rate cut has opened the door to more such cuts across major economies. Most central banks have been watching and waiting for the US central bank to make its first move. Notably, the Bank of Canada might increase the size of its rate cuts after Wednesday’s FOMC meeting. The Canadian dollar strengthened slightly on Friday before ending down. Data revealed robust retail sales figures for July, easing worries of a weak economy. However, rate-cut bets remained high, especially after the Fed’s meeting.
Meanwhile, the pound went against the trend, rising after upbeat retail sales data. Sales increased by a stronger-than-expected 1% in August, indicating solid consumer spending. Moreover, the Bank of England held rates as expected as policymakers worried about service inflation.
Market participants are now watching the Reserve Bank of Australia meeting this week. The central bank will likely keep rates unchanged. Notably, Australian employment figures last week showed robust demand, lowering the probability of a near-term rate cut.
