The US dollar saw weakens against major currencies on Tuesday. This shift follows Monday’s gains as markets prepare for crucial inflation data and a highly anticipated US presidential debate. Despite the anticipation, neither event is expected to alter the Federal Reserve’s monetary policy.
Safe-haven currencies like the yen and Swiss franc gained value amidst a slump in bank shares. Analysts attribute this to the Federal Reserve's regulatory chief announcing a plan to increase large banks’ capital by 9%. This news disappointed many bank investors and critics of the new rules. The S&P 500 banks index experienced a 2.7% drop to 408.2, reaching a one-month low at one point.
As market participants await the Federal Reserve's meeting next week, there's a strong expectation of a rate cut, the first in over four years. While a 25 basis point cut seems more likely, there’s still some debate over the size. Fed funds futures show a 67% chance of a 25 bp cut and a 33% chance for a 50 bp cut, according to recent calculations. Last Friday, after the mixed US labor report, the odds for the 50-bp cut surged to 50%.
Eugene Epstein, head of structured products at Moneycorp, noted that the market has been consolidating. “If you look at the dollar index’s one-month chart, we are essentially in the middle of the range," he said, indicating that rates have been the main driver of recent market movements.
While the focus remains on inflation, the Federal Reserve is less concerned about short-term fluctuations in prices and more focused on employment trends. Investors are closely watching Wednesday’s consumer price index report for insights. Economists predict that the headline US CPI will rise by 0.2% month-on-month in August, which would mirror July’s figure.
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