US: Soft landing still in sight – Danske Bank

FXStreet Insights Team FXStreet

Economic growth is slowing mostly in line with our expectations, but we think recession risks remain low. We make only marginal adjustments to our forecast profile and see 2024 GDP growth at 2.5% (from 2.3%) and 2025 at 1.5% (unchanged), Danske Bank macro analysts note.

Fed to reach a terminal policy rate of 3.00-3.25%

“Potential output continues to grow at a brisk pace, supported by increases in labour supply, solid productivity growth and fiscal policy driven demand for manufacturing investments.”

“Risks to the outlook remain somewhat skewed to the downside. The current low savings rate indicates that consumers' buffers remain weak. Slow monetary policy pass-through and high share of fixed rate mortgages suggest that rate cuts will not provide a rapid boost to economic growth, if the outlook deteriorates faster than we expect.”

“Inflation forecasts have been adjusted modestly lower. We see headline inflation averaging 2.9% in 2024 (from 3.2%) and 2.2% in 2025 (from 2.5%) and core inflation at 3.3% in 2024 (from 3.4%) and 2.4% in 2025 (from 2.6%). We now expect the Fed to cut interest rates by 25bp at every meeting from September until June 2025 (prev. only every other meeting from September), followed by two final cuts in H2 2025 (terminal rate 3.00-3.25%; prev. 3.75-4.00%).”

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD holds above 0.6950 as bullish USD caps gains

AUD/USD edges lower during the Asian session on Tuesday, stalling a two-day recovery move from a two-month low, touched last week. An extended rout in the fixed income market keeps US bond yields elevated near multi-year highs. This, along with geopolitical uncertainties, helps the US Dollar retain its bullish tone despite receding October Fed hike bets. However, expectations for another RBA rate hike this month could act as a tailwind for the Aussie.

USD/JPY rises back above 158.00 despite hawkish BoJ outlook

USD/JPY rises back above 158.00 in the early European morning on Tuesday. The pair strengthens as the Japanese Yen fails to find any inspiration from hawkish BoJ expectations and looming intervention risks. Meanwhile, geopolitical uncertainty and elevated US bond yields keep the US Dollar near its YTD high despite receding October Fed hike bets. This, in turn, helps the pair stay supported.

Gold seems vulnerable near two-month low amid strong USD, higher US bond yields

Gold sticks to modest intraday losses heading into the European session, though it holds above the $4,100 mark, a two-month low touched earlier this Tuesday. The US Dollar retains its bullish tone and continues to undermine demand for the commodity. However, receding bets for an October Fed rate hike act as a tailwind for the non-yielding bullion and help limit further losses.

Ripple and Stellar weaken as derivatives positioning fades

Ripple (XRP) and Stellar (XLM) face pressure trading below $1.499 and $0.220, respectively, on Tuesday after a modest correction at the start of the week. Traders should be cautious as weakening derivatives metrics and fading bullish momentum suggest further corrections for XRP and XLM. Derivatives data shows a weakening and cautious signal among traders.

Europe in focus as French and Spanish politics drive sentiment

There are no tier-1 releases today. Focus will remain on developments in the European markets and geopolitical developments in the Middle East. In France, the key issue in the coming days will be whether the Socialists and Marine Le Pen's National Rally signal they are willing to topple the government over the budget.

Eurozone inflation just hit 3.8%, its highest in three years. This chart shows why the ECB can’t simply hike its way out

The ECB would normally have a relatively straightforward answer to inflation running almost twice its target: raise interest rates. But these are not normal circumstances. This time, the bond market is already doing part of the tightening for it, leaving the ECB facing an increasingly difficult dilemma.