The US Dollar: Slipping on Peers’ Strength and Soft Fed Market Anticipations

The US Dollar found itself on the back foot on Monday, hitting its lowest point since mid-January. The Greenback’s descent is largely driven by a sharp surge in the Japanese Yen, which appreciated by over 1% against the USD. Bullish sentiment on the JPY is gaining momentum, with Asian and European investors seemingly jumping on the bandwagon as the new week unfolds:

The JPY’s strength is particularly significant when we consider its substantial weighting in the US Dollar Index. As the Yen climbs, it exerts downward pressure on the DXY, dragging it to levels not seen in nearly seven months.
While the USD struggles, the broader market’s focus is gradually shifting to Wyoming, where the annual US Federal Reserve’s Jackson Hole Symposium will take place later this week. This event, often a platform for pivotal monetary policy announcements, is set to feature speeches from key central bank figures, including Fed Chair Jerome Powell. Historically, Jackson Hole has been the stage where the Fed hints at potential shifts in policy outside of its regular meetings, making it a must-watch for traders.
Ahead of the symposium, economic data releases are sparse, but the US Purchasing Managers Index on Thursday could provide some valuable insights into the current state of the US economy. Moreover, interest rate derivatives, such as overnight index swaps (OIS) currently indicate a 72% probability of a 25 basis points rate cut by the Fed in September, with a smaller, but not negligible, 28% chance of a 50 bps cut. As traders brace for Powell’s speech, the market is also pricing in another 25 bps cut in November, with a growing minority even betting on more aggressive easing.
Turning our gaze to Pound Sterling, the currency has begun the week on a bullish note, echoing broad-based USD weakness. Inflation in the UK is hovering around the BoE’s 2.0% target, and services inflation, while still elevated, has started to ease, dropping to 5.2% in July from 5.7% in the previous month:

Last week’s UK Retail Sales data offered a glimmer of hope with a 0.5% rebound in July, following a disappointing 0.9% contraction in June. Additionally, the UK’s unemployment rate dipped to 4.2% in Q2, down from 4.4% in Q1, and GDP growth picked up to 0.9% from 0.3% over the same period. Despite these positive signals, the BoE cut interest rates in August to 5.00% from 5.25%, a move that typically dampens the GBP by reducing foreign capital inflows.Market sentiment remains cautious, with less than a 50% probability of another 0.25% rate cut in September. However, Capital Economics forecasts two more 0.25% cuts before year-end, which could be a factor constraining significant upside potential in the British currency.
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