Investor sentiment regained momentum across markets after U.S. inflation data for August strengthened expectations for a Federal Reserve rate cut at its upcoming meeting. With attention now turning to Europe, traders are gearing up for the European Central Bank’s (ECB) widely anticipated rate reduction today, as policymakers remain committed to supporting growth amid persistent economic uncertainty.
Optimism surrounding the Fed’s ability to guide the U.S. economy toward a soft landing has oscillated with concerns that the central bank may have delayed its policy pivot for too long. Currently, market swaps are pricing in a 25 basis-point cut next week, but the debate around the trajectory of future rate reductions is intensifying. Some investors caution that markets may have become overly optimistic, potentially overpricing the scope for further easing as inflation risks persist.
The latest data from the U.S. Bureau of Labor Statistics provided mixed signals. The core Consumer Price Index (CPI), which strips out volatile food and energy costs, climbed 0.3% in August, marking the highest monthly increase in four months. On a year-over-year basis, core inflation rose 3.2%, while the three-month annualized rate accelerated to 2.1%, up from 1.6% in July, according to calculations by SARACEN MARKETS. These figures underscore that while inflation is moderating, it remains a key variable in the Fed’s policy outlook.
In currency markets, the U.S. dollar index remained steady after weakening on Wednesday. Oil extended its rally as Hurricane Francine tore through key oil-producing regions in the Gulf of Mexico, sparking a wave of short-covering among bearish traders. Brent crude saw gains build on the back of concerns over supply disruptions. Meanwhile, gold traded firmly above $2,515 per ounce, as investors sought safe-haven assets amid global uncertainties.
In Japan, the yen saw modest gains after Bank of Japan (BoJ) policy board member Naoki Tamura indicated the possibility of raising the benchmark rate to at least 1% by the end of the projection period. This was followed by further gains in the yen on Wednesday, after another BoJ board member, Junko Nakagawa, affirmed that the central bank would continue to adjust its policy stance as long as the economy meets expectations. The yen’s movements suggest ongoing volatility as traders assess the timing and pace of potential shifts in Japan’s ultra-loose monetary policy.
As global markets continue to navigate a complex macroeconomic landscape, the interplay between inflation data, central bank decisions, and geopolitical risks will remain in focus. With the ECB expected to deliver another rate cut and the Fed on the brink of easing, investors are bracing for heightened market volatility in the days ahead.