Forex News

MUFG’s Michael Wan highlights that FX measures to attract US Dollar (USD) inflows into India have significantly lowered Indian Rupee (INR) rates via added liquidity, with limited impact on USD/INR. Following more hawkish August Monetary Policy Committee (MPC) minutes, Wan expects the Reserve Bank of India (RBI) to have ended its easing cycle and to start hiking rates by 50bps from December, supporting a view that INR rates should move higher.

RBI stance points to rising INR yields

"In Asia, another key example where there has been intervention is in India, with the FX measures to draw Dollar inflows including through the FCNR(B) route having quite a meaningful impact on lowering INR rates through an influx of liquidity and to a much smaller extent USD/INR."

"Moving forward, we think that there’s a good chance INR rates move higher from here, and we like paying INR 5y NDOIS (current: 6.467%) as a potential way to express that view."

"First, the August MPC minutes was more hawkish than the actual policy meeting and also what markets expected, and also suggests the RBI has reached the end of its easing cycle with the next move higher rather than lower."

"We continue to expect RBI to hike rates by 50bps starting in the December meeting, with domestic growth remaining quite robust, credit growth accelerating, the lagged mipact from earlier oil price increases, fiscal policy supportive with a likely wider fiscal deficit, coupled with possible interaction with adverse weather events."

"Second, the early closure of the FCNR(B) facility also suggests that the incremental market pricing from here is for liquidity absorption by the RBI and less room for lower rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/GBP trades with mild gains near 0.8570 in Friday’s early European session. 
• UK Retail sales dropped 0.5% MoM in July, while annual sales growth slowed to 1.6% during the same period. 
• Expectations of tightening ECB policy support the Euro against the British Pound. 

The EUR/GBP cross posts modest gains to around 0.8570 during the early European session on Friday. The British Pound (GBP) edges slightly lower against the Euro (EUR) following disappointing UK economic data. Traders await the preliminary readings of the Purchasing Managers Index (PMI) from Germany, the Eurozone and the United Kingdom (UK) for fresh impetus. 

UK Retail Sales fell for the first time since April, with the total volume of goods sold in stores and online declining 0.5% MoM in July, according to the Office for National Statistics (ONS) on Friday. This figure followed a rise of 0.7% in June (revised from 1.0%). The market consensus was for a 0.5% decline in the reported month.

Meanwhile, the annual Retail Sales in the UK increased 1.6% in July versus a rise of 3.8% prior (revised from 4.2%) and worse than the 2.2% expected. The core Retail Sales, stripping the auto motor fuel sales, declined by 0.9% MoM in July, versus 0.9% (revised from 1.1%)  prior and the estimated -0.5% figure. 

The GBP attracts modest sellers in an immediate reaction to the weaker UK Retail Sales data. The Bank of England (BoE) is likely to leave interest rates unchanged at 3.75% for the rest of the year, according to a strong majority of economists polled by Reuters.

On the other hand, financial markets are now pricing in a continuation of the European Central Bank (ECB) hiking cycle. The ECB Watch Tool indicates a 90% to 94% chance of a 25 basis points (bps) hike to 2.50% at the next policy meeting scheduled for September 9.

BoE rate expectations ease as inflation and labour data cool

Analysts at Danske Bank note that the latest inflation release, when viewed alongside “yesterday's weak labour market data,” has helped to temper market expectations for further tightening. They highlight that the combination of softer price pressures and deteriorating employment indicators “has taken the top off BoE pricing for the remainder of the year,” as investors reassess the likelihood of additional rate hikes.

Technical Analysis: EUR/GBP remains capped under the 100-day SMA

In the daily chart, EUR/GBP maintains a mildly bearish bias as it holds below the 100-day simple moving average (SMA). Price is consolidating just above the 20-period Bollinger middle band, with the upper band capping the latest rebound. The Relative Strength Index (14) at 54.33 is slightly above the neutral line, hinting at stabilizing momentum but not yet strong enough to challenge the prevailing topside constraints.

On the topside, immediate resistance is located at the upper Bollinger band around 0.8585, followed by the 100-day SMA at 0.8615, which forms a more significant barrier to any sustained recovery. On the downside, initial support is provided by the Bollinger middle band at 0.8560, ahead of the lower band near 0.8535, where a break would reopen the path toward deeper losses.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

• Long-end bond buyback plans could push Treasury yields and the US Dollar lower.
• Surging oil prices and Iran sanctions could restore safe-haven demand for the Greenback.
• Maximum economic pressure on Tehran aims to prevent large-scale military escalation in the Gulf.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is holding losses after registering minor gains in the previous day and trading around 98.80 during the early European hours on Friday.

The Greenback has drawn lower alongside a steady 10-year US Treasury yield at 4.7% as markets react to Washington's efforts to curb elevated yields through a long-end bond buyback program. However, US Treasury yields recovered Wednesday’s losses on Thursday despite comments from Treasury Secretary Scott Bessent indicating that accelerated debt buybacks could surpass the planned $4 billion per issue. Bessent also noted that an upcoming fiscal plan is currently in development, with the US budget deficit expected to have peaked under President Trump.

Meanwhile, safe-haven demand for the US Dollar could revive as oil prices surge due to diplomatic deadlocks in the Gulf, reinforcing ongoing inflation concerns and Federal Reserve rate hike bets. Tensions mounted as Washington prepared an "economic D-day" initiative aimed at severely restricting Iran's economy. Set to be formally announced on Monday, these proposed US measures target banks, shipping registries, cash transfers, and smuggling networks to cut Tehran off from global markets and compel it to negotiate on nuclear and regional issues.

According to a CNBC report, Treasury Secretary Scott Bessent noted that the administration's campaign to dismantle Iran's economic lifelines will likely eliminate the need for significant military intervention. He stated that applying maximum economic pressure makes a large-scale kinetic escalation far less probable.

US yields climb again as Treasury buyback boost fades

OCBC’s Sim Moh Siong cautions that the recent rally in US rates has proved short-lived, noting that “US bond yields resumed their climb, reversing much of the initial reaction to the Treasury's surprise expansion of its long-end buyback programme.” He frames the move as a “yield reality check,” underscoring lingering concerns over the sustainability of lower long-term borrowing costs in the face of ongoing fiscal and structural pressures.

Deutsche Bank strategists note that United States (US) equities fell sharply as earlier gains in fixed income reversed, with losses across the S&P 500, Nasdaq and Magnificent Seven. Weak Walmart earnings and slower US sales growth added to concerns about consumer resilience. Overnight sentiment improved modestly, with US equity futures edging higher while Asian markets traded mixed, led by gains in Korea, Hong Kong and mainland China.

US and Asian stock performance mixed

"Equities struggled yesterday in response to the unwinding of fixed income gains, with the S&P 500 (-0.87%) posting its biggest decline of August so far. The Nasdaq (-1.00%) and the Mag-7 (-1.11%) saw larger losses, even as the Philly Semiconductor index (+0.53%) reversed some of its losses from earlier this week."

"Sentiment also wasn’t helped by earnings from Walmart (-9.15%), whose shares slumped after the company saw its slowest US sales growth since 2020 at +2.6% yoy. So that renewed questions about the health of the US consumer amid the backdrop of high energy prices, rising interest rates and a low saving rate."

"In the equity space, Europe’s Stoxx 600 (-0.12%), DAX (-0.42%) and CAC 40 (-0.57%) declined, whilst the FTSE 100 (+0.04%) inched up."

"The equity mood has improved a bit overnight, with both the S&P 500 (+0.06%) and NASDAQ (+0.20%) edging higher, while Asian markets are mixed. The Nikkei (-0.30%) is underperforming, but the Hang Seng (+0.72%) and CSI 300 (+0.52%) are advancing."

"Korea’s KOSPI is also up +0.89% following on a +5.89% surge yesterday. That’s been helped by a +2.10% gain for Samsung Electronics as Bloomberg reported that the company plans to announce a new package of dividends and buyback of up to 110trn won ($79bn)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Here is what you need to know on Friday, August 21:

Following the sharp decline seen midweek, the US Dollar (USD) Index struggles to stage a rebound and stays slightly above the three-month low it set near 98.50 on Thursday. Preliminary August Manufacturing and Services Purchasing Managers' Index (PMI) data from Germany, the Eurozone, the UK and the US will be featured in the economic calendar on Friday.

In the absence of high-impact macroeconomic data releases on Thursday, the US Dollar's selloff lost steam but the currency failed to gather strength against its major rivals as investors assessed the impact of the US Treasury Department's decision to boost long-term bond sales on the Federal Reserve's policy outlook.

US Dollar support seen as US sanctions risk lifts inflation expectations

DBS Group Research economist Chang Wei Liang cautions that the recent adjustment to US Treasury buybacks is unlikely to be a game-changer for markets. He argues that, “without any meaningful change to the US fiscal trajectory (given that the US budget is set by Congress and not the Treasury), tweaks around buybacks can only have a small, transient impact on markets.”

At the same time, Chang flags geopolitical risks that could reinforce the Dollar’s bid. He notes that “an expected tightening of US sanctions on Iran to be announced on Monday could pose unintended consequences, including risks of bolstering inflation expectations that lift both US yields and the USD.”

Meanwhile, St. Louis Fed President Alberto Musalem delivered a hawkish speech on Thursday, with an FXS Speechtracker score of 7/10. The emphasis on strong growth, accommodative financial conditions, underlying inflation stuck around 2.5%-3%, and the notion that hiking rates now could avert more aggressive action later underscored a bias toward pre-emptive tightening even as Fed credibility and policy independence are reaffirmed. References to potential supply shocks from a “super El Nino,” high input costs, and some credit crowding out reinforced an inflation-focused narrative that is supportive of the Dollar on balance, while the refusal to prejudge the September FOMC kept near-term rate expectations data-dependent.

The UK's Office for National Statistics announced on Friday that Retail Sales declined by 0.5% on a monthly basis in July, following the 0.7% increase recorded in June. GBP/USD showed no immediate reaction to this data and was last seen trading with small gains at 1.3650.

Following Thursday's choppy action, EUR/USD edges higer in the European morning on Friday and trades near 1.1700.

Gold gathers bullish momentum to start the European session and trades at its highest level since late May above $4,550.

According to TD Securities, recent policy signals remain broadly constructive for bullion, with “the signal of the Treasury looking to support the longer end, alongside a Fed willing to look past higher energy prices” seen as “enough to support the yellow metal in the near-term.” However, the bank cautions that “with the market still pricing in hikes for 2027, the next leg higher for gold is unlikely to materialize before the broader market becomes more convinced that the Fed remains on hold.”

USD/JPY rose about 0.6% on Thursday and erased a large portion of Wednesday's losses. The pair loses its traction early Friday and trades marginally lower on the day below 159.00.

• GBP/USD stands tall, just below six-month highs, at 1.3660, on track for a 0.8% weekly rally.
• UK Retail Sales contracted 0.5% in July, in line with market expectations.
• The US Dollar remains on the defensive, weighed by the US Treasury's plan to boost buybacks of long-term securities.

The British Pound (GBP) trades firm against the US Dollar (USD) on Friday, with the GBP/USD pair pushing against six-month highs in the 1.3660 area at the time of writing, on track for a 0.8% weekly rally. UK Retail Sales confirmed that consumption fell in July, but the pair maintains its bullish tone intact, as the US Dollar remains on its back foot, hammered by the Treasury’s bond buyback plans.

Data released by National Statistics on Friday revealed that retail consumption contracted 0.5% in the UK in July, in line with market expectations, following a  0.7% increase in June. Year-over-year, sales increased at a 1.6% pace, down from 3.8% in June and below the consensus 2.2%.

The decline has been broad-based, as excluding fuel, sales of all other products fell 0.9% in July, reversing the 0.9% increase posted in June.

Beyond that, Public Sector Net Borrowing increased by GBP 1.8 billion in July, below June’s GBP 12.78 billion but exceeding the market expectations of GBP 0.3 billion.

Treasury buybacks keep weighing on the USD

The US Dollar remains on the defensive as US Treasury Secretary Scott Bessent affirmed on Thursday that bond buybacks might increase beyond the $4 billion per operation announced one day before.

On Wednesday, the US Treasury disclosed a plan to double liquidity to repurchase long-term securities, in a move aimed at stemming the yield rally. The return for the 30-year Treasury Bond had reached 19-year highs earlier this week, with investors increasingly reluctant to buy US Government Bonds, amid concerns about escalating debt, which topped 40 trillion earlier in the week.

Strategists at BBH see the this plan as a debt-management swap ”under which the Treasury “buys and retires older, less liquid bonds (off-the-run) in favor of new, more liquid debt (on-the-run) issued through its regular auction.” BBH experts, however, warn that that investors come to believe that “the Treasury is managing yields rather than liquidity,” which, in their opinion “undermines US fiscal credibility and is a drag on USD.”

Commerzbank’s Volkmar Baur notes the US Dollar remains under pressure as EUR/USD trades around 1.17 following the US Treasury’s expansion of its Liquidity Support Buyback Operations. He compares the move to Operation Twist, arguing its impact on long-term yields should be modest but highlighting that the Treasury appears willing to tolerate a weaker Dollar to contain rates, adding a structural risk for USD.

Treasury buybacks and USD vulnerability

"The US dollar remains under pressure. After losing about 0.8% on a trade-weighted basis on Wednesday following the US Treasury’s announcement that it planned to buy more long-term bonds, the dollar stabilized over the course of yesterday; however, EUR/USD still rose above 1.17 for the first time since May. And this level is once again in focus this morning."

"The expansion of the purchase program is therefore more comparable to “Operation Twist,” in which the Fed swapped long-term bonds for short-term bonds in 2011–12 to lower interest rates at the long end of the yield curve. At that time, the Fed sold short-term bonds (with maturities of up to 3 years) totaling USD 667 billion to purchase bonds with maturities ranging from 6 to 30 years. The program ran for a total of 15 months, amounting to USD 44.5 billion per month."

"At the time, it was estimated that Operation Twist (or the MEP, Maturity Extension Program) would lower the current yield on 10-year Treasury bonds by about 23 basis points. The impact of the expansion of the Liquidity Support Buyback Operations is therefore likely to remain modest as well."

"For the US dollar, there are ultimately two takeaways: First, the US Treasury appears to have a breaking point beyond which it is willing to intervene in the market to support interest rates, at least at the long end. When Warsh says that the market should do part of the job of fighting inflation, but the Treasury then intervenes when interest rates rise, one naturally wonders who is supposed to tackle inflation at that point."

"And second, and this is probably more important, Wednesday’s episode shows that if faced with the choice between accepting higher interest rates or a weaker US dollar, the Treasury would rather see a weak USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)