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Weak Economic Data Fuels Rate Cut Speculation; Dollar Declines for Third Session

2 weeks ago

A spate of soft economic data has bolstered the case for Federal Reserve interest-rate cuts, leading to a third consecutive session of declines for the dollar. Reports on Wednesday revealed the American services sector contracted at its fastest pace in four years, while the labor market continued to show signs of softening. These developments have reignited speculation of a rate cut as early as September.

Weaker Treasury yields and a sliding dollar, driven by dovish rate expectations, have buoyed risk sentiment across markets. The slowing US growth outlook is making a September rate cut increasingly probable, with swap traders now pricing in almost two cuts in 2024, the first likely in November. Minutes from the Fed’s June policy meeting highlighted officials’ need for more evidence of cooling inflation and their divided stance on maintaining elevated rates.

Market sentiment is also influenced by political uncertainty, as traders watch for any signs of President Joe Biden potentially withdrawing from the presidential race. Wall Street is reallocating funds across assets that could be impacted by a possible return of Donald Trump to office.

Attention now turns to Friday’s US jobs report, with economists forecasting a gain of 200,000 in June non-farm payrolls, down from the previous month, and an unemployment rate steady at 4%. This payroll report could be pivotal for the Fed as it seeks justification for easing rates.

Chicago Fed President Austan Goolsbee cautioned that the central bank needs to see more data before committing to rate cuts.

In commodities, gold prices rose for a second day after breaking out of a tight trading range.

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