Dollar Rebounds as Fed’s Rate Cut Fails to Soothe Bond Markets
The US dollar staged a rebound last week after the Federal Reserve announced a widely anticipated 25 basis-point cut to overnight rates. Instead of fueling a rally in bonds, the move sparked a sell-off in US Treasuries, while equities gained ground.
Markets appeared to have positioned for a more dovish outcome, and the lack of consensus—highlighted by just one vote in favor of a deeper 50 basis-point cut—left investors unconvinced. Still, equities surged, and the dollar held within the trading range that has defined much of the summer.
This week’s economic calendar is relatively light, with global Purchasing Managers’ Index (PMI) releases on Tuesday set to provide fresh insights into business activity, particularly in Europe. Meanwhile, attention remains fixed on the US bond market, where medium- and long-term yields remain stubbornly high despite Fed easing.
GBP
The Bank of England maintained its cautious, wait-and-see approach, as inflation readings held closer to 4% than 3% in both headline and core measures. This stagflationary backdrop complicates the case for further cuts.
Recent UK labor market data painted a mixed picture. “While survey measures suggest robust expansion of employment, tax data on payrolled employees showed another small monthly contraction,” said Enrique Díaz-Álvarez, Chief Economist at Ebury. “No such ambiguity was on display in the government budget numbers for August, which showed that expenditure and the deficit continue to outpace all predictions. All in all, we think that the downside risks to the Pound are finely balanced by support from high interest rates and cheap valuation by most measures.”
EUR
Following the European Central Bank’s rate cut to what is widely seen as the cycle low of 2%, the euro has slipped from the spotlight in currency markets. Eurozone growth remains sluggish, though still supported by strong labor markets and consumer services spending, helping the bloc avoid outright recession. Investors will look to Tuesday’s PMI figures for a clearer assessment of the region’s economic momentum.
USD
The Federal Reserve’s 25bp rate cut drew mixed market responses. Equities welcomed the move, extending their rally to record highs, while bond markets reacted with disappointment.
“Bonds seemed to be disappointed by the fact that only the most recent Trump appointee to the board voted for a 50bp cut, and by the wide dispersion of expectations evident in the ‘dots plot,’ which suggest deep divisions about whether to prioritize above-target inflation or the weakening labor market,” Díaz-Álvarez noted.
Traders now turn their focus to Thursday’s release of the August Personal Consumption Expenditures (PCE) inflation report, a key gauge for the Fed’s policy outlook and the US dollar’s trajectory.