Forex Report

Good morning

The good news is that the latest US consumer price inflation reading came in as expected yesterday and we were spared any nasty surprises.  The bad news is those expectations called for an increase in inflation, which was duly met, and the Dollar is on the front foot. 

These are the mid rates at 5:55 today:

Market News

• The Rand has been able to hold below R18.00 to the Dollar over recent sessions but not by much, this as we managed to strengthen to R17.76 yesterday before a US data release provided support for the Dollar which in turn knocked us back to R17.95.  The week has already been an interesting one data wise but we still have two important data sets to navigate, let’ see where the rate goes from here. 
• As usual, there’s a lot going on in the world of finance with each focal point having an impact on currency pricing, but the biggest headline from yesterday came in the shape of the US CPI report.  May’s reading had come in at 2.4% on an annual basis and 0.1% on a monthly basis, levels not far from the FED’s annual 2% target and the reason why Donald Trump has been so vocal about the FED needing to slash interest rates by between 1% and 2% with immediate effect, but the FED have repeatedly told us they need to see what impact Trump’s tariffs will have on inflation over an extended period of time and with June’s reading jumping to 2.7% and 0.3% respectively it looks like those impacts are starting to filter through. 
• A few weeks ago the FED funds futures had risen to over 60bps in cumulative cuts for 2025 which meant that the market was certain the FED would cut at least twice (25bps per cut) and there was a chance that they might even deliver a third cut by year’s end.  The Dollar Index sold off heavily as a result and the Rand made it to R17.49 at the time, but with inflation on the up the picture has changed with bets of 2025 cuts falling to 43bps after yesterday’s report while the Dollar Index has pushed up from 96.47 to 98.60 since early July.  The Dollar is gaining ground as chances of FED rate cuts diminish and all eyes will be on today’s producer inflation report (PPI) as this is seen as an indication of where CPI is headed in the coming months. 
• The following is from CNBC and suggests that higher US inflation readings going forward could push the first rate cut back to December unless we see a material decline in the health of the US labour market which would force the FED into action:  The Dollar reached a 15-week high against the Japanese Yen on Tuesday as US consumer prices increased by the most in five months in June, while traders also pared expectations on how many times the FED is likely to cut interest rates this year. “A slightly softer-than-expected June core inflation reading keeps alive the chances of a September FED interest rate cut, but the risk is that we get less benign prints for July and August,” James Knightley, chief international economist, US at ING said in a note. “That means we will need to see clear evidence of softer jobs figures to trigger FED action before December.”
• Inflation, and what it means for FED pricing, is the market’s main focal point but the increasing pressure on FED Chair Jerome Powell from the Trump administration is also catching some of the market’s attention.  Treasury Secretary Scott Bessent confirmed yesterday that the formal process to identify Powell’s successor has already started which isn’t too out of the ordinary given the importance of the role, but at the same time Trump has criticised Powell for a massive overspend in renovations of the FED’s headquarters which has crept up to $2.5bn while also suggesting that this overspend could amount to a fireable offense.  If Powell is replaced with someone more open to cutting rates that would be Dollar negative, the prospect of which might just limit the Dollar’s advances as speculation swirls. 
• Local market data today sees our May retail sales report at 1pm.
• Possible USD mid rate trading ranges in the Rand today are R17.70 and R18.00.

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