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- The European Central Bank slashed interest rates for the second consecutive meeting.
- The UK will publish the August inflation report and deliver its rate decision on Thursday.
- The Federal Reserve is expected to cut interest rates in its Wednesday monetary policy meeting.
- The South African rand’s rally continued ahead of the first SARB rate cut.
- The Japanese yen and Turkish lira will react to the respective central banks’ meetings.
Euro wavers after ECB cut
The euro wavered against the US dollar and sterling after the European Central Bank (ECB) decided to slash interest rates for the second time this year. The bank slashed rates by 0.25% to 3.50% to stimulate an economy that is slowing.
Economists expect that the ECB will deliver more cuts to ease borrowing costs among companies and consumers.
In a note, analysts at Goldman Sachs said that their base case is where the bank delivers consecutive cuts starting in December.
The key European data to watch this week will be the bloc’s inflation report scheduled on Wednesday.
These numbers are expected to show that the bloc’s consumer price index remained unchanged at 2.2% while the core CPI remained at 2.8% in August.
Bank of England's decision
The GBP/USD and EUR/GBP pairs will be in the spotlight this week as the UK publishes its inflation report on Wednesday and the Bank of England delivers its decision on Thursday.
These numbers are expected to show that the country’s headline inflation remained unchanged at 2.2% while the core CPI rose from 3.3% to 3.5%.
Inflation is an important data that the Bank of England focuses on.
In most cases, the bank cuts rates when interest rates are falling and hikes when they are rising.
Most economists and the swap market estimate that the Bank of England will leave interest rates unchanged at 5.0% in its Thursday meeting. The BoE simply wants to see the impact of its last interest rate cut.
Analysts then expect a series of more cuts starting in its November meeting. A key concern for the bank is that wage growth has remained stubbornly high. High wages often lead to higher inflation.
The GBP/USD pair was trading at 1.3125, a few points below the year-to-date high of 1.3267.
US dollar index waits for Fed interest rate cut
The US dollar index continued its downward trend ahead of the Federal Reserve interest rate decision on Wednesday.
Economists expect the Fed to deliver its first interest rate cut since 2020 in this meeting. What is unclear, however, is the size of the cut. Some analysts expect the Fed to cut rates by 0.50% while others see it cutting by 0.25%.
The Fed will cut rates because of the ongoing fear that the economy is heading toward a hard landing.
Data released last week showed that the headline Consumer Price Index (CPI) dropped to 2.5% in August, its lowest point since 2020. Core inflation, on the other hand, remained at 3.2%.
The labor market has also softened in the past few months, with the unemployment rate remaining above 4.2% in August.
In a statement, analysts at Bloomberg said:
Anything other than a 0.25% rate reduction at the Fed’s meeting would surprise markets, yet rate markets might take cues from shifts in the 2025 median dot within the summary of economic projections. If the Fed’s rate outlook shifts, short-end rate markets are likely to quickly adjust following a knee-jerk move on the rate-cut announcement.Bloomberg
South African rand waits for SARB decision
The South African rand continued strengthening against the US dollar ahead of the upcoming SARB interest rate decision.
Economists expect the bank to start cutting interest rates in this meeting on Thursday. An economic report expected on Wednesday is expected to show that the headline CPI dropped to 4.5% in August.
The decision comes at a time when the USD/ZAR exchange rate has dropped by over 8% this year. This makes it the South African rand one of the best-performing currencies in the emerging market.
It has also risen because of the coalition government between the ANC and Democratic Alliance, which has led to robust business and consumer confidence. There are also signs that Eskom has reduced the frequency of load-shedding in the country.
Japanese yen carry trade unwind
The USD/JPY exchange rate continued falling, reaching a low of 140.23, its lowest point in December last year. It has dropped by over 13.4% from its highest point this year.
The pair will be in the spotlight this week as the Bank of Japan (BoJ) delivers its interest rate decision on Friday.
Recent economic numbers showed that the country’s inflation rose to 2.8% in July. Other data showed that the economy is slowing. Therefore, there is a likelihood that the bank will leave interest rates unchanged.
However, as it did in the last meeting, the bank may catch investors by surprise by hiking interest rates by 0.25%.
A rate hike by the BoJ and a cut by the Fed would reduce the spread between the two countries' bond yields. As a result, that would eliminate the carry trade that has existed for a long time.
Turkish lira sits at a record low
The lira remained near its all-time low ahead of the Central Bank of the Republic of Turkey (CBRT) interest rate decision.
The bank is expected to leave rates unchanged for the sixth consecutive time even as inflation continued falling. The most recent economic numbers showed that the headline CPI dropped to 52% from the year-to-date high of 72%. It remains substantially higher than other countries and analysts estimate that it will end the year at 40%.
Turkey has received a series of credit rating upgrades by the likes of Fitch, Moody’s, and S&P Global because of the orthodox monetary policy and a cut in government spending.
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