Dollar weakens in anticipation of rate cut

The Dollar slid against major foreign currencies last week, including the euro and the UK pound, as speculation intensified that the Fed Funds Rate might be cut in September. The minutes for the July Federal Reserve policy meeting revealed the “vast majority” of the committee were leaning towards a reduction at next month’s meeting, barring any unexpected surprises in the upcoming economic data. Also, official data for the number of jobs in the U.S. in the year to March 2024 was revised downwards. The strength of the jobs market has been a concern to the Fed rate setters, so evidence it is weaker than previously supposed will count in favor of cutting the Fed Funds Rate. Then on Friday, speaking at a Federal Reserve conference in Wyoming, Fed Chair Jay Powell said: “the time has come for policy to adjust”; which the markets took as confirmation a rate cut is coming.

The provisional PMI index for the U.S. came in stronger than expected, which suggests the economy is experiencing a ‘soft landing’. The August PMI read at 54.1, which was down slightly from 54.3 in July, but higher than the Wall Street forecast of 53.5. The convention for the index is that a reading of over 50 suggests the commercial side of the economy is growing. However, concerns are growing on potential supply chain disruption in the coming weeks due to the possibility of strike action at U.S. ports on the East and Gulf coasts. Last week saw the Canadian government intervene to end a lockout at two railroad companies, demonstrating that labor unrest in the logistics sector is growing. Around 75% of Canada’s exports to the U.S. are transported by rail.

This week sees the release of PCE Price Index inflation data for July, which is the measure of price rises the Federal Reserve uses for making policy decisions. The two other widely quoted inflation indices – PPI for factory gate prices and CPI for consumer prices – both decelerated in July, so we are forecasting the PCE index to follow suit. Another slowdown for inflation will increase the likelihood of a September cut for the Fed Funds Rate.

Things to watch for this week

Tuesday, August 27

S&P CoreLogic Case-Shiller 20-city Home Price Index, m-o-m, June

Previous: 1.0%
Forecast: 1.0%

This house price index saw m-o-m price growth rebound earlier in the year, reaching 1.6% in March, but momentum slowed as expectations on when the Fed would cut rates rolled back. We are forecasting the figure for June to be similar to the 1.0% rise reported for May.

Friday, August 30

U.S. PCE Inflation, July

Previous: 2.5%Forecast: 2.4%

The declines recorded for PPI and CPI inflation in July confirmed that price pressures are easing across the economy. Consequently, we are predicting a deceleration for PCE inflation.