Written by Ankur Banerjee
SINGAPORE (Reuters) – Sterling edged up on Thursday after strong British GDP data, while the euro held above $1.10, close to a more than seven-month high hit the previous day, supported by data showing slowing U.S. inflation that boosted expectations for a Federal Reserve interest rate cut next month.
Markets were calmer after the recent turmoil but sterling rose 0.2% against the dollar to $1.2856 after data showed the UK economy grew by 0.6% in the second quarter of 2024, in line with economists’ expectations and building on a rapid 0.7% recovery in the first quarter of the year.
The pound also rose against the euro, which fell 0.2% to 85.66 pence.
The single European currency was steady against the dollar at $1.10090, after hitting $1.10475, its highest level this year, on Wednesday, as markets tried to digest U.S. inflation figures.
The data showed that the consumer price index rose moderately, in line with expectations, and the annual rise in inflation slowed to below 3% for the first time since early 2021.
These figures add to a slight increase in producer prices in July, suggesting that inflation is on a downward trend, although traders now expect the Federal Reserve to not be as aggressive in cutting interest rates as they had hoped.
The next data point is US retail sales due at 1230 GMT on Thursday.
“Monetary easing is certainly getting closer, but the market is putting that in the context of what we saw at the beginning of last week when there was a huge move in expectations for the Fed,” said Jane Foley, head of foreign exchange strategy at Rabobank.
“Instead of some being excited about the possibility of a move, they are disappointed that we may not get a 50 basis point cut.”
The CME FedWatch tool showed markets now see a 64% chance of a 25 basis point rate cut next month and a 36% chance of a 50 basis point cut. Traders were evenly split between the two cut options at the start of the week after last week’s selloff.
“As the market tries to figure out the extent of the Fed’s rate cuts for the rest of the year, retail sales will be weaker, and we also have Walmart (NYSE:) earnings which will add some flavor to the economic data,” Foley said.
The yen held steady at 147.21 against the dollar after data showed Japan’s economy expanded at a faster-than-expected annual rate of 3.1 percent in the second quarter on a strong rebound in consumption, keeping near-term interest rate hikes on the table.
While the yen has moved away from a seven-month high of 141.675 against the dollar touched during last week’s market turmoil, it remains well above a 38-year low of 161.96 where it was rooted in early July.
Tokyo’s bouts of intervention early last month, followed by a surprise interest rate hike by the Bank of Japan in late July, spooked investors who pulled out of popular carry trades, sending the yen higher.
The Norwegian krone was little moved as the country’s central bank kept interest rates unchanged, at 11.783 kroner per euro and 10.695 kroner per dollar.
The Australian dollar rose 0.36 percent to $0.6620 after data showed hiring in Australia accelerated more than expected in July, even as the unemployment rate rose to a two-and-a-half-year high.
Strong labour demand could bolster the RBA’s argument that an interest rate cut is unlikely this year given how stubbornly stubbornly inflation is.
Elsewhere, major currencies fell against the dollar on disappointing data showing China’s industrial output growth slowed and failed to meet expectations in July.