Dollar firms after CPI, euro awaits ECB, techs lead equities rebound

Mixed CPI report disappoints

US inflation fell to the lowest since February 2021 in August, but the bigger-than-expected drop in the headline figure was overshadowed by an acceleration in the monthly core measure. Wednesday’s CPI report was the last major piece of data before next week’s policy announcement by the Fed and in the same fashion as the other key releases preceding it, it offered a mixed bag of good news for investors.

While the decline in annual CPI to 2.5% might have been enough for a majority of Fed officials to vote for 50-basis-points at their September meeting, core CPI unexpectedly picked up to 0.3% month-on-month, pointing to still present upside risks to inflation.

Dollar boosted as hopes of 50-bps cut dashed

The CPI numbers were in essence investors’ last hope of swaying the Fed to go for a larger cut, but neither the growth nor inflation data support the case for an aggressive move at this point in time. Today’s readings on producer prices are unlikely to alter much either.

Market expectations of a 50-bps cut have been almost completely priced out, though investors are still anticipating a 100-bps reduction in total by year-end.

The US dollar extended its recovery from Friday’s lows against a gauge of currencies, but it’s more of a crawl higher and much of whether this uptick is sustainable or not will probably depend on how many rate cuts the Fed will pencil in in its latest dot plot.

Euro soft ahead of ECB decision

A firmer greenback isn’t helping the euro, which has been drifting lower this week as the European Central Bank is almost certain to cut interest rates today for a second time this cycle. The main focus for traders is what President Christine Lagarde will signal about the pace of future cuts.

Eurozone inflation is within a whisker of the ECB’s 2% target and the economic outlook has deteriorated somewhat over the summer, particularly in Germany. Hence, Lagarde might be less hesitant to flag back-to-back rate cuts in her press briefing to reporters.

Pound muted, yen supported by hawkish BoJ 

The pound has also not been having a positive week as the latest UK data suggest the Bank of England has scope to ease policy further in the coming months. Even though a cut is unlikely next week, policymakers might strike a more dovish tone, and this is weighing on sterling.

Against the yen, however, the dollar has been struggling over the past 10 days on renewed bets that the Bank of Japan is not done hiking yet. After yesterday’s hawkish comments by Nakagawa, board member Naoki Tamura went a step further today and called for rates to rise to at least 1% by the second half of 2025.

But the dollar’s broader upswing is helping the US currency to climb back above 142 yen after yesterday brushing an eight-month low of 140.70 yen.

Stocks bounce back as Nvidia soars

Equities have been steadily rebounding this week despite worries about a US recession and fading expectations of a 50-bps cut in September. It’s likely that the selloff in tech stocks was overdone and there’s a bit of the usual buy-the-dip taking place.

Nvidia is leading the bounce, surging by 8% on Wednesday on reports that the US government may permit the AI giant to sell advanced chips to Saudi Arabia. The Nasdaq rallied sharply to close 2.2% higher, while the S&P 500 ended the session up 1.1%.