FOREX-Currencies muted as traders await economic data for US rate path clues

The U.S. dollar was steady on Thursday as traders weighed the prospect of a measured Fed easing cycle following a cautious tone from policymakers while awaiting economic data that may outline the impact of tariffs and the outlook for rates. Traders have priced in 43 basis points of rate cuts in the remaining two meetings this year although comments from officials including Federal Reserve Chair Jerome Powell indicate that a lot will depend on the upcoming economic data.

The lack of clarity and consensus on future easing has meant traders are no longer fully pricing in a cut next month. The dollar has edged higher since the Fed lowered interest rates last week, as expected. The euro last bought $1.1752, 0.12% higher Asian hours after dropping 0.6% in the previous session. Sterling was at $1.3464 after also slipping 0.6% on Wednesday.

The dollar index, which measures the U.S. currency against six other units, eased a touch to 97.744, but hovered near its highest level since September 11 it touched overnight. The index is on the cusp of eking out a gain for the month, although the greenback has been on the back foot for much of the year against major peers and is down nearly 10% in 2025.

Vasu Menon, managing director of investment strategy at OCBC Bank, said there are concerns that if U.S. growth turns out to be stronger than expected, the Fed may not cut as many times in 2026 as the futures market is suggesting currently. "This has led to some degree of caution in the short term."

San Francisco Fed President Mary Daly echoed other central bankers by suggesting while further rate cuts are needed, their timing remains unclear. "Will they come right now, this year or going forward?" Daly said. "It's hard to say, but what's really important is that making those policy adjustments will likely be required to balance both of our goals," she said, referring to the Fed's dual mandate.

DATA DEPENDENT The spotlight will be on U.S. economic data, including the Fed's preferred gauge of inflation, the Personal Consumption Expenditures report on Friday and the final estimate for second quarter GDP on Thursday, while the prospect of a government shutdown looms large.

Investors are keenly looking for clues on the impact of the sweeping tariffs unleashed by U.S. President Donald Trump that has upended the global trade order. Data so far has not fully revealed the impact of tariffs on prices and the economy. "Tariff-led price pressures remain a wild card," said Laura Cooper, global investment strategist at Nuveen. "While markets are leaning toward consecutive cuts by year-end, sticky inflation makes that path far from assured."

Cooper anticipates PCE price inflation peaking near 3.2% later this year, keeping inflation above target for longer. "That alongside the FOMC's data-dependent stance still argues for patience." The yen strengthened after minutes of the Bank of Japan's July policy meeting showed some board members called for resuming interest rate hikes. In its September meeting, the BOJ held rates steady but faced two dissents, indicating that rate hikes were not far off.

Markets see a roughly 50% chance of a rate hike at the BOJ's next policy meeting on October 29-30, when the board will also release fresh quarterly growth and inflation forecasts. The yen was at 148.62 per U.S. dollar, inching away from the three-week low it touched on Wednesday, with investors also keeping an eye on who becomes Japan's next prime minister after Shigeru Ishiba's decision earlier this month to step down.

Ben Bennett, L&G Asia head of investment strategy, said the small hawkish surprise by the BOJ has been brushed aside by the focus on the LDP leadership election and whether this results in easier fiscal policy. "How this progresses should be the key determinant of the yen in the next two weeks."

The Swiss franc was steady at 0.7948 per U.S. dollar ahead of a policy meeting later in the day when the Swiss National Bank is expected to hold its main rate at zero, its first pause since late 2023. The New Zealand dollar was 0.31% higher at $0.5825, inching away from the one-month low it touched on Wednesday when Swedish central banker Anna Breman was named as the next central bank governor, becoming the first woman in the role.

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