Forex Market Insights: Core inflation aligning with the 2% target

This summer has witnessed significant market shifts, fueled by contrasting perspectives on the US economy. Initial fears of high inflation have subsided, with core inflation now aligning with the 2% target. 

This summer has seen significant market movements, driven by differing views on the US economy. Earlier concerns about high inflation have eased, with recent data showing core inflation aligning with the 2% target. This shift in inflation dynamics has redirected focus towards the necessity of rate cuts to support the economy. July’s unemployment increase to 4.3% sparked recession fears, leading markets to price in aggressive rate cuts. However, strong retail sales figures, which indicate robust economic growth, have created a counter-narrative to the recession concerns.

Globally, the European Central Bank (ECB) may hold off on further cuts due to persistent above-target inflation in the Eurozone. The global manufacturing recovery appears to have slowed, particularly in China, where additional stimulus might be necessary to reignite economic momentum. Japan’s surprise rate hike in July, combined with strong Q2 GDP growth, suggests that further hikes are likely, indicating a divergence in monetary policy among major economies.

The upcoming PMI data and the Jackson Hole Symposium will be crucial in shaping market expectations and potentially alleviating recession fears. In recent weeks, market volatility has eased, and expectations for rate cuts have become more moderate. Looking ahead, it seems likely that while rate cuts are on the horizon, they will be gradual and carefully considered, with economic data continuing to play a crucial role in shaping market expectations.

On the currency front, the US$-INR pair experienced a narrow range, with a slight fluctuation of 8 paisa, closing the week at 83.95. The dollar index fell by about 1% to an eight-month low of 102.27, influenced by declining Producer Price Index (PPI) and Consumer Price Index (CPI) figures, which indicate cooling inflation and increased chances of a harsh landing for the US economy. However, positive US Retail Sales data shifted the outlook, easing recession fears and reducing the likelihood of a sharp rate cut by the Federal Reserve.

In India, strong fundamentals have supported market performance, with the BSE Sensex and Nifty 50 indices ending the week higher by approximately 1.6% each. Robust US economic data has fueled a global stock rally, easing concerns about a recession. India’s trade deficit remains comfortably positioned around $23.50 billion, while the Consumer Price Index (CPI) surprised markets by declining to 3.54% from 5.08% in July. Despite the economic contraction in Q2, a rate cut by the Reserve Bank of India (RBI) seems unlikely. Overall, the fundamentals point towards a potential appreciation of the Rupee as the Fed considers rate cuts and the Indian central bank maintains its interest rates.