South African rand holds gains after US inflation data

British Pound

Reuters: Sterling gained slightly versus the dollar on Wednesday, recovering from a dip earlier in the session, but slid against the euro after data showed Britain's economy stagnated unexpectedly in July, as manufacturing output fell. British economic output showed no change in month-on-month terms in July, as it did in June, data from the Office for National Statistics showed. A Reuters poll of economists had forecast 0.2% month-on-month growth in gross domestic product.

"We should not worry too much about the miss," analysts at Peel Hunt said in a note, pointing to still healthy forward-looking business activity surveys and highlighting the known volatility of monthly data, particularly in heavy industries. Also analysts at JPMorgan said July economy output is not indicative of the trend. However, upside risks to third-quarter GDP growth have faded, they said. Deutsche Bank senior economist Sanjay Raja said that after seeing upside risks to third-quarter GDP growth, relative to the bank's baseline of 0.4% quarter on quarter, it now sees downside risks building.

Sterling edged up 0.1% to $1.3093, after sliding to $1.3071 earlier in the session. The dollar fell to its lowest against the yen this year after investors increased the chances of Democrat Kamala Harris beating Republican rival Donald Trump in November's presidential election after a scheduled debate. The pound fell 0.7% against the yen to 185.05 yen, around its weakest in a month. Investors were also awaiting a key U.S. inflation report that could provide indication of how aggressively the Federal Reserve will cut rates next week.

The euro rose versus sterling, trading 0.14% higher at 84.37 pence. The Bank of England is expected to keep interest rates unchanged next week, although markets show traders believe it could cut once more this year, probably in November. In the coming weeks, focus in UK markets will also be on the new Labour government's first budget next month. Banks in Britain are intensifying their lobbying against potential tax hikes in the upcoming budget on Oct. 30, amid worries it may tap the sector to boost public finances, senior industry sources told Reuters.

US Dollar

Reuters: The dollar traded near a four-week high versus the euro on Thursday after signs of some stickiness in U.S. inflation reinforced expectations that the Federal Reserve would avoid a super-sized interest rate cut next week. Meanwhile, a quarter-point rate reduction from the European Central Bank is widely expected later on Thursday, with investors anxious for hints on how soon the monetary authority will cut again. The dollar gained against the yen, following a turbulent session on Wednesday that saw the U.S. currency plunge as much as 1.24% to the lowest this year before recovering all its losses after the consumer price data.

Early on Wednesday, Bank of Japan board member Junko Nakagawa reinforced the central bank's tightening bias by saying low real rates leave room for further rate hikes. On Thursday, fellow BOJ board member Naoki Tamura, known as a policy hawk, said the market's expected pace of tightening could be too slow - comments that helped put a floor under yen weakness. These speeches are a sign of an important shift in communication style at the bank, according to Shoki Omori, chief Japan desk strategist at Mizuho Securities.

"The BOJ is trying to get markets to price in a hike using forward guidance instead of using media outlets, which is a good change," he said. "But markets aren't used to it, so that's one reason why yen volatility has risen in recent weeks." The dollar rose 0.13% to 142.55 yen as of 0200 GMT, after earlier gaining as much as 0.41%. It dipped as low as 140.71 for the first time since Dec. 28 in the prior session, following Nakagawa's comments. The rebound in the dollar-yen pair "has left signs of downside capitulation at the 140.71 low, opening the way for a recovery back towards 145.50," said Tony Sycamore, an analyst at IG.

The pair tends to track U.S. long-term Treasury yields, which bounced back forcefully after dipping to a 15-month low of 3.605% on Wednesday, and were ticking up in Asian time on Thursday to last stand at 3.6665%. The U.S. consumer price index rose 0.2% last month, matching the advance in July. Excluding the volatile food and energy components, however, the gauge climbed 0.3%, accelerating from the previous month's 0.2% increase. As a result, traders essentially priced out the chances of a 50-basis point rate cut on Sept. 18, paring the odds to 15% versus 85% probability for a 25-bp reduction.

There are still 104 bps of cuts priced by year-end though, meaning markets expect a 50-bp cut at either the November or December meeting. For the ECB, markets are essentially 100% priced for a quarter point reduction on Wednesday, with an array of policymakers backing another cut following June's quarter-point reduction. The euro was flat at $1.1009, sticking close to Wednesday's low of $1.1002, the weakest since Aug. 16. Sterling edged lower to $1.3038, after dipping as far as $1.30025 in the previous session for the first time since Aug. 20. The Swiss franc was also on the back foot, with the dollar steady at 0.85215 franc, after touching the highest since Aug. 21 at 0.8544 franc on Wednesday.

South African Rand

Reuters: The South African rand held on to gains against the dollar on Wednesday after U.S. inflation data reinforced expectations that the Federal Reserve will opt for a smaller 25 basis point rate cut at its policy meeting next week. At 1545 GMT, the rand traded at 17.91 against the dollar, about 0.2% firmer than Tuesday's closing level. The U.S. consumer price index grew 2.5% year-on-year in August, the smallest year-on-year rise since February 2021, but core inflation picked up, reducing the likelihood of a 50 basis point rate cut.

"Despite the fact that it is widely anticipated that the Federal Reserve will reduce interest rates next week, the magnitude of the rate cut is still uncertain," said Wichard Cilliers, head of market risk at TreasuryONE. In the absence of major local economic data releases on Wednesday, the rand has been moving on global factors. On Thursday, July mining figures will be published. Economists polled by Reuters predict the sector will show year-on-year growth after declining in June, reflecting volatile conditions in Africa's most industrialised economy. On the Johannesburg Stock Exchange, the Top-40 index closed more than 1% lower. The benchmark 2030 government bond was little changed.

Global Markets

Reuters: Asian shares bounced on Thursday, tracking a tech-driven rally on Wall Street, while the dollar held onto gains after U.S. core inflation surprised slightly on the upside and dashed hopes of a large rate cut by the Federal Reserve next week. Investors are now awaiting a policy decision from the European Central Bank later in the day where a rate cut is almost a certainty, but the question remains whether it would move again in both October and December. MSCI's broadest index of Asia-Pacific shares outside Japan rallied 1%. The Nikkei jumped 3%, helped by a weaker yen, which pulled back from its 2024 high of 140.71 per dollar.

Earlier in Asian trade, the yen had eased further to a low of 142.95, but was last flat at 142.40 per dollar, perhaps helped a little by hawkish comments from a senior Bank of Japan official who called for raising rates at least to 1%. EUROSTOXX 50 futures rose 1.2% while FTSE futures gained 0.9%. U.S. stock futures were slightly lower. Overnight, U.S. data showed core consumer price index rose 0.28% in August, compared with forecasts for a rise of 0.2%. It was enough of a steer for markets to almost abandon the chance of a half-point rate cut from the Federal Reserve next week, with probability for such a move at just 15%.

"We wanted answers to help settle the 25bp vs 50bp Fed rate cut debate on Friday, but now it seems the market has made its own mind up," said Chris Weston, head of research at Pepperstone, referring to the mixed August payrolls report last Friday. "We are now comfortable with calling a 25bp cut for September, but also open-minded to the idea that a weak U.S. payrolls report on 4 October would fully open up a 50bp cut in the November FOMC meeting." The disappointment over core inflation figures had pressured Wall Street but again tech stocks came to the rescue, with AI darling Nividia jumping 8%, helped by a media report that the U.S. government is considering letting the company export advanced chips to Saudi Arabia.

Regional tech-heavy share markets followed suit, with Taiwan adding 2.2% and South Korea gaining 1.1%. China's share markets were subdued, while Hong Kong's Hang Seng edged 0.4% higher. In the foreign exchange market, the dollar traded near a four-week high versus the euro , which eased to $1.1007, sticking close to Wednesday's low of $1.1002 - the weakest since Aug. 16. Short-dated U.S. Treasuries sold off overnight. Two-year Treasury yields held at 3.3193%, having risen 4 basis points overnight, while ten-year yields were at 3.3291%.

That left the 2-10-year yield curve flattening slightly and barely remaining positive at just 1 bp. Oil bounced overnight on fears that Hurricane Francine could lead to lengthy production shutdowns in U.S. Brent crude futures held at $70.65 a barrel, after gaining 2% overnight. It also found support at $68.69, the lowest level in almost three years. Gold traded at $2,513.75 an ounce, just a touch below its record high of $2,531.60.

Read more here