US Dollar firm as geopolitics heat up; investors await US inflation data

LONDON, Sept 10:  The US Dollar (USD) held steady on Wednesday ahead of U.S. inflation data this week that could help shape the outlook for Federal Reserve policy, while a fraught geopolitical backdrop underpinned the likes of the Swiss franc.

Employment data in the last week has shown the U.S. economy created far fewer jobs in the last year than expected, which has made a rate cut from the Fed next week look like a certainty.

Yet it has not dented confidence in the equities market, where stocks trade at record highs, nor has it had much immediate impact on the dollar itself, even as investors weigh up the chances of a jumbo half-point cut from the Fed next week.

Israel’s attempted killing of Hamas leaders with an airstrike on Qatar on Tuesday, along with Poland shooting down drones that entered its airspace during a Russian attack in western Ukraine on Wednesday, were keeping investors nervous.

“The market has made up its mind, and probably quite rightly, that the Fed is going to be cutting interest rates. But for one, there’s been quite a lot in the price in terms of between now and the end of next year,” said Jane Foley, head FX strategist at Rabobank.

“On the other hand, playing in the same direction is the geopolitical uncertainty. There is the Poland news, there is the Qatar news. None of that is reassuring,” she said.

The euro was subdued against the dollar, but jumped as much as 0.5% against the Polish zloty to 4.268 zloty, set for its biggest one-day rise in three months at one point .

In terms of Fed expectations, traders are fully pricing in a quarter-point cut next week, with a minor chance of a half-point cut. This week’s reports on wholesale inflation due on Wednesday, and consumer inflation on Thursday, could affect that outside prospect of a larger cut, analysts said.

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BAR HIGH FOR 50-BASIS POINT CUT

“The bar for a 50-bp move is high, there would likely need to be a clear downside surprise in core inflation to give doves cover,” said Kieran Williams, head of Asia FX at InTouch Capital Markets.

“Given sticky services prices and the Fed’s preference for signalling gradualism, a jumbo cut next week looks unlikely, but the data will shape how aggressively the market prices the easing path into year-end.”

Meanwhile, the prime ministers of both France and Japan have resigned this week, stirring up uncertainty over the political and economic outlook in two out of the world’s seven richest countries.

The euro was little changed at $1.1701 after dropping 0.5% in the previous session, while the yen was flat at 147.47 per dollar and the Swiss franc was not far off Tuesday’s seven-week highs, with the dollar trading at 0.797 francs.

The dollar index , which measures the U.S. currency against six others, was steady. It has fallen by 10% this year, dented by chaotic U.S. trade and fiscal policy and by growing concern about the independence of the central bank.

Markets reflected little reaction to a court ruling that temporarily blocked President Donald Trump from removing Fed Governor Lisa Cook, a case that is likely to end up before the U.S. Supreme Court.

Data on Tuesday showed the economy likely created 911,000 fewer jobs in the 12 months through March than previously estimated, suggesting jobs growth was already stalling before Trump’s aggressive tariffs on imports.
The data did not offer much insight into job creation since March, leaving U.S. rate expectations unchanged for now.

“I think a 50 bp would do more damage than good for sentiment at this point,” said Matt Simpson, a senior market analyst at City Index in Brisbane. “Besides, the Fed will want to save face and not fully succumb to Trump’s wishes.
“Markets are pricing in three cuts over the next three meetings and the Fed is in a good position to play nicely with those expectations, or increase odds of cuts in 2026 – without succumbing to a 50 bp cut next week,” Simpson said.