WJR News

The U.S. dollar regained some lost ground on Monday, while the yen gave up part of its safe-haven gains as traders remained uncertain about the scale of the Federal Reserve’s anticipated rate cut later this month. Investors are looking toward this week’s U.S. inflation data for further clues on the Fed’s policy direction.

Dollar Gains as Fed Rate-Cut Uncertainty Lingers

Currency markets saw the dollar edge up by 0.13%, with the U.S. Dollar Index climbing to 101.33. The dollar’s recovery came after Friday’s U.S. jobs report failed to provide clear signals on whether the Federal Reserve would opt for a 25-basis-point rate cut or a more aggressive 50-basis-point cut at its upcoming policy meeting.

While the nonfarm payrolls report showed lower-than-expected job growth, the jobless rate fell slightly, and wage growth remained steady, indicating that the U.S. labor market is cooling but not at an alarming rate. This has left traders grappling with mixed signals.

“The Fed finds itself at a crossroads,” said Boris Kovacevic, global macro strategist at Convera. “With mixed signals from the job market, they’re unlikely to commit to either a 25 or 50 bp cut just yet.”

Yen Loses Safe-Haven Gains

After rising 2.73% last week due to market volatility and risk aversion, the yen surrendered some of its recent gains. The currency was down 0.44% at 142.92 per dollar on Monday. Despite data showing that Japan’s economy expanded at a slower-than-expected pace in the April-June period, the market appeared unfazed.

“The market brushed off Japan’s economic data,” noted Kovacevic. The yen’s decline comes as traders wait for the next signal from the Federal Reserve on its monetary policy stance.

China’s Yuan Faces Pressure

In China, data released Monday revealed that consumer inflation had accelerated in August, driven primarily by higher food costs due to extreme weather, but producer price deflation deepened, highlighting continued struggles in the economy. This led to renewed calls for additional stimulus measures.

The onshore yuan fell 0.3% to 7.1117 per dollar, while the offshore yuan eased 0.27% to 7.1142 per dollar.

Saktiandi Supaat, regional head of FX research at Maybank, said, “The report could continue to perpetuate deflation fears. While there have been talks of reserve requirement ratio cuts, further easing may result in a weaker yuan.”

Euro and Sterling Slip Amid Mixed Sentiment

The euro and sterling both slipped in Monday’s trade as traders assessed the global economic outlook. The euro fell 0.1% to $1.1075, while sterling dropped 0.08% to $1.3119.

Amid the global uncertainty, David Doyle, head of economics at Macquarie, added, “While more substantial cuts through year-end are possible should data deteriorate, our baseline remains for a 25 bps rate cut in September, with easing at this pace also likely to occur in November and December.”

Australian and New Zealand Dollars Mixed

The Australian dollar advanced slightly, gaining 0.04% to $0.6673, recovering from a 1% fall on Friday, which saw the currency hit a three-week low. Meanwhile, the New Zealand dollar declined by 0.13% to $0.6167, remaining close to a two-week low reached last week.

U.S. Inflation Data and Fed Decision Loom

As traders await the release of Wednesday’s U.S. inflation report, the market remains cautious about the potential for more significant moves by the Federal Reserve. Futures pricing shows a 29% chance that the Fed could deliver a 50-basis-point rate cut next week. However, most market analysts still expect a more modest 25-basis-point cut.

“Fed policymakers have signaled they are ready to kick off a series of interest rate cuts,” noted Doyle, emphasizing that the direction of U.S. inflation will likely dictate the Fed’s course for the remainder of the year.