forex trading - the South African rand has fallen back further on Tuesday, following a slide fuelled by rising geopolitical risks from heightened tensions in the Middle East

Forex trading news: Rand drops, Dollar climbs!

In forex trading, the South African rand has fallen back further on Tuesday, following a slide fuelled by rising geopolitical risks from heightened tensions in the Middle East and lower market expectations of a US Federal Reserve interest rate cut.

At 1541 GMT, the rand traded at 19.0300 against the dollar, 0.2% down from its previous close, and up against a basket of major currencies. On the same day, the dollar firmed to a five-month peak against a basket of other major currencies but eased from the highs of the day.

Forex trading: South Africa under strain

Most recent US economic data, including consumer confidence and jobs numbers, have led to a reversal of markets forecasts, and the earliest view for a Fed rate cut now sits at September, compared with July cuts that were more widely expected in past weeks.

Meanwhile, the South African stock market has retreated, with Top-40 index and an all-share index closing almost 2% down respectively.

An easing in South Africa’s benchmark 2030 government bond also pointed to general weakness across the market, with its yield rising by 7.5 basis points to 10.860%.

US Dollar Climbs

In Forex trading, the dollar climbed to a five-month high against the euro, and the yen dropped to a 31-year low of 155.83 – the closely watched threshold traditionally designed to alert Japanese authorities of the potential need for intervention.

The dollar’s strength followed better-than-expected economic growth numbers, including retail sales for the month of March.

which are raising questions about whether a discount rate cut by the Federal Reserve that was widely anticipated earlier this year might be put on hold due to surprisingly high inflation rates and a perception of a more robust US economy in recent months.

Burgeoning geo-political tensions between Israel and Iran also serve to make the dollar a safe haven for those wary of holding their wealth in competing currencies.

At the weekend, the tensions increased significantly, pushing the dollar even higher.

Meanwhile, as these developments were occurring, Israel’s war cabinet was meeting to consider how to respond to Iran’s most direct blow to its state ever – coming only days after the world had demanded that tensions in the Middle East be defused.

Forex trading – Fed rate cuts

Later in the week, we’ll hear from Fed Chair Jerome Powell on how recent trends in inflation and geopolitical developments might inform the US monetary policy in the weeks and months ahead.

Markets have shifted their view recently, anticipating just one more cut this year – now most likely to come in September.

Meanwhile, on another front, US housing data reported that construction of single-family homes fell in March but the market is underpinned by the tight supply of existing homes and higher mortgage rates deter prospective new buyers.

Even though the dollar faces such pressures, the dollar index barely moved today with the gauge touching 106.43, which was its highest level since early November but ended the session at 106.21.

At the same time, the euro regained some ground, and attention turned to the Japanese yen, which was close to a new threshold as market chatter about possible intervention by Japanese monetary authorities to prop up the yen increased.

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On 14 March, Japan’s Finance Minister Shunichi Suzuki said that the authorities are ‘paying close attention to yen movements’.

He added: ‘As necessary, we will take resolute action against any factors that move the yen upward from a medium- to long-term fundamental perspective.’

Kenneth Broux, head of global macro research at the French lender Societe Generale, cautioned that intervention may slow the yen’s decline, but it would be difficult to reverse the policy implications of upward currency moves:

‘If it’s the dollar that’s the driving force, due to increasingly robust US growth and rising US bond yields, then reversing this trend would be difficult and quite costly, particularly for a dollar-hedged economy such as Japan,’ Broux said.

The Australian dollar also fell to a new low, and bitcoin eased.

Sterling was at a five-month low against the dollar on Tuesday as data showed a bigger-than-forecast rise in Britain’s unemployment, although it steadied for the day.

The pound was at $1.24475 against the dollar – matching its trough since 17 November – and trading even with the euro at 85.36 pence.

The unemployment rate in the UK for the three months to February rose to 4.2%, up from 3.9%, in spite of some sampling volatility in data picking up by changes in reporting methodology undertaken by the Office for National Statistics.

That is a bigger increase than the 4.0% forecast by economists in a Reuters poll.

Wages excluding bonuses grew 6.0% year-over-year, a bit slower than a 6.1% increase in the previous period.

‘The labour market is clearly decelerating,’ said Kenneth Broux, head of corporate research, FX and Rates at Societe Generale The slump could be seen as good news for those at the Bank of England who want rate cuts but, according to Broux, it suggests less good news for sterling against the dollar.

Investors will be expecting the inflation figures on Wednesday for further clues when the Bank of England’s (BoE) easing cycle might start.

The markets are pointing to August for the BoE’s first move, with the data suggesting that 46 basis points in rate cuts are priced for this year.

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An August cut now looking likely from the Bank of England, despite emerging economy turmoil promised 38 basis points of cut in 2018 by 2 July, but it still isn’t fully priced, with 30 basis points expected by 2 August, according to data from the London Stock Exchange Group (LSEG).

Meanwhile, recent higher-than-expected inflation numbers in the US prompted markets to anticipate rate cut more, and the Federal Reserve’s first anticipated rate cut has been brought forward from June into September.

The willingness of the European Central Bank to cut interest rates next month depends on Decisions such as those of the ECB can be complicated by international developments.

Forex trading – ECB bank weakness

The ECB policymaker Olli Rehn said on Tuesday that the European Central Bank could cut interest rates in June, as long as all goes smoothly between now and then.

At last week’s ECB meeting, the bank signalled willingness to drop rates in June, provided inflation dropped as expected.

‘That is do depends on there being no new complications, such as the geopolitical ones that could influence energy prices,’ Rehn said in reference to Middle East/Russia problems.

While a number of his colleagues have begun to talk about additional rate cuts beyond June, Rehn did not preview those rate cuts.

The ECB takes its rate decisions meeting by meeting.

‘We decide in the meeting on the information we have on the horizon at that particular time,’ Rehn told the European Parliament’s economic and monetary affairs committee.

The Japanese Finance Minister Shunichi Suzuki said on Tuesday that he was closely watching the currency movements and that a ‘thorough response will be taken as needed’ after the dollar hit a new 34-year high.

The dollar traded at around 154.15 yen, after the greenback had hit 154 yen in Asia on Monday evening – the highest level since June 1990.

‘For FX issues, I am not aware if there is any plan to specifically gather to discuss FX at the G20 FMs’ meeting in Washington this week,’ Suzuki said in a press briefing, adding that he expected them to come up anyway.

Suzuki said: ‘As for international issues including FX matters, Japan will make use of various occasions, not only G20, to strongly express its position when necessary.’

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