Chip stocks fall with Nvidia after data center rev disappointment
US President Donald Trump appears to be advancing efforts to broker a Russia-Ukraine truce. Markets are pricing in cautious optimism: oil, dollar, and the Swiss franc all came under pressure. CHF remains vulnerable amid the collapse of US-Switzerland trade talks. The Bank of England is widely expected to cut rates today, but don’t expect any dovish shift
USD: Things Moving Fast on Tariffs, Geopolitics, and Fed
Developments this week are unfolding rapidly across three key areas: tariffs, geopolitics, and the Federal Reserve. The first two are somewhat interconnected when it comes to India, which has faced a tariff hike to 50% in response to its economic ties with Russia. Yesterday’s rate hold from the Reserve Bank of India seems to go in the direction of currency stability – and perhaps in the hope of a trade de-escalation.
The 88.0 level in USD/INR appears to be the key line of defence; should the RBI allow it to pass that level, the rally could accelerate in the near-term. Things aren’t looking much better for Switzerland on trade, as we discuss in the EUR section below, and the franc is back to being pressured.
What is also encouraging a rotation away from the franc is the more tangible possibility of a Russia-Ukraine truce. Trump is reportedly arranging meetings with both Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky as early as next week, and said there has been “great progress” on talks with Russia.
With respect to the Ukraine war, the dollar still retains its role as a geopolitical risk hedge, especially due to the link with energy prices. Both crude and the dollar came under pressure yesterday.
Finally, the Fed succession saga. A media report suggested Trump is being advised to replace resigning FOMC member Adriana Kugler with an interim official until January and wait until then to announce his Fed Chair pick. We should get a decision soon, as Kugler’s resignation comes into effect tomorrow.
As discussed in yesterday’s FX Daily, we think the nomination of Kevin Hassett, who is considered the frontrunner, is a negative event for the dollar due to his dovish views and greater perceived exposure to Trump’s influence compared to the other main candidate, Kevin Warsh.
The dollar weakened yesterday, influenced by optimism around a Ukraine-Russia truce and the alignment with lower front-end swap rates. Three Fed officials (Mary Daly, Lisa Cook and Neel Kashkari) raised concerns over the jobs market deterioration. Cook specifically characterised the July payroll revisions as “typical of turning points”, and Daly said risks are skewed to more than two cuts this year.
We’ll hear from Atlanta Fed President Raphael Bostic today (neutral, non-voter), but the mood seems to be shifting in off-meeting FOMC communication – seemingly as a prelude to a more official dovish turn at Jackson Hole (21-23 August), unless inflation data shocks next week. Our new Fed call is three cuts by year-end, as discussed here.
We expect some stabilisation in the dollar after yesterday’s correction and amid a rather light US data calendar. Still, our USD short-term bias remains bearish.
EUR: Ukraine Truce Hopes Helping Euro
Trump’s optimism on a Ukraine-Russia truce is likely feeding into euro strength, which stands in complete opposition to the dollar on the matter. Should a truce become a more tangible prospect, EUR/USD and EUR/CHF are expected to serve as the primary channels for euro appreciation.
As noted above, the franc continues to suffer from deteriorating US-Switzerland trade relations. The Swiss President returned from a Washington visit yesterday without securing improved trade terms, reducing the likelihood of an imminent deal. Nevertheless, Swiss National Bank pricing remains anchored, with less than a 50% implied probability of an additional rate cut following the unexpected tariff-driven rebound in July.
The trigger for a dovish rethink – and another CHF selloff – might be the additional burden of larger-than-expected US pharma tariffs, which are currently excluded from the 39% rate applied to Switzerland but expected to be announced next week.
On EUR/USD, our call for today is neutral, but the balance of risks remains tilted to the upside, even beyond 1.170.
GBP: Widely Expected Cut Today
The Bank of England is widely expected to continue its recent pattern of quarterly cuts and reduce the Bank rate by 25 basis points to 4.0% today. Here is our full guide to today’s meeting.
The reaction in sterling will be primarily driven by the vote split; expect dissenters on both sides. At least one member (Catherine Mann) should vote for a hold, and might be joined by two more (Huw Pill and Megan Greene), although this is not our base case. Arch-dove Swati Dhingra should vote for 50bp, with some risks of fellow dove Alan Taylor joining her.
However, we wouldn’t read too much into the vote split, which has little predictive power for future decisions. Policy guidance should incidentally remain untouched, still signalling “gradual” and “careful” easing ahead.
Markets are pricing in the next cut in either November or December. While the risks appear tilted on the dovish side, there isn’t enough evidence that the jobs market deterioration is happening at an alarming pace, nor that services inflation is easing. We don’t think the BoE will offer reasons to heavily revise expectations on the dovish side today.
EUR/GBP may stabilise around 0.87 in the near term, while incoming fiscal decisions by the UK government in August continue to limit the likelihood of significant corrections. We have a more positive view on the pound against the dollar, and the potential pricing out of geopolitical risk in Europe bodes well for Cable, which can find its way back to 1.35 into the fourth quarter.
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