"Currency Markets Remain Flat as Traders Anticipate Fed Rate Cut"

Currencies showed little movement on Monday, with the yen hovering at its highest levels for the year due to a holiday in Japan. Market activity was subdued, with Japan, China, and South Korea closed. The dollar remained steady at 140.86 yen, close to the 140.285 low from late December, and fell 1.3% against the yen last week.

The Federal Reserve’s upcoming meeting on September 17-18 is the week’s major event, alongside policy announcements from the Bank of England and the Bank of Japan later in the week. Treasury yields have declined in anticipation of a possible half-point rate cut by the Fed. The benchmark 10-year yield was at 3.65%, unchanged from Friday, and has decreased by 30 basis points over the past two weeks. Two-year yields, which are more sensitive to monetary policy expectations, were at 3.57%, down from around 3.94% two weeks ago.

Chris Weston, head of research at Pepperstone, noted that selling dollars for yen has been a favorable strategy for investors capitalizing on falling Treasury yields. He advised monitoring the December lows for the dollar-yen pair.

There is still a slight edge toward a quarter-point cut by the Fed, but opinions are mixed. Recent Fed speeches and economic data have left markets uncertain whether the Fed will opt for an aggressive approach to labor market weaknesses or a more measured stance.

Fed fund futures indicate a 52% chance of a 50-basis point cut at the September meeting, with a total of 125 basis points in rate cuts expected for 2024. Attention is also on the Bank of Japan’s decision on Friday, expected to maintain its short-term policy rate at 0.25%. The BOJ’s decision follows the yen’s recent gains and the unwinding of yen-funded carry trades.

Political changes in Japan are also on the horizon, with the Liberal Democratic Party electing a new leader on September 27 to replace Prime Minister Fumio Kishida. Leading contender Sanae Takaichi has suggested that the BOJ should pause further rate hikes to support economic recovery.

The British pound edged up 0.05% to $1.3132, while the euro rose 0.11% to $1.1088. The dollar index fell 0.1% to 101. The European Central Bank’s recent 25 basis point rate cut has been tempered by ECB President Christine Lagarde’s remarks on future rate adjustments.

The Bank of England is expected to hold its key interest rate steady at 5% next week, following an initial reduction in August. Meanwhile, the Bank of Canada is considering increasing the pace of rate cuts after a series of quarter-point reductions since June.