The USD/CNH pair has maintained positive momentum for the third consecutive day, trading around 7.2935 during Asian trading hours on Monday. This upward movement is largely driven by a surprise rate cut by the People’s Bank of China (PBoC).
Early Monday, the PBoC announced a 10 basis point (bps) reduction in the one-year Loan Prime Rate (LPR), lowering it from 3.45% to 3.35%. Similarly, the five-year LPR was cut from 3.95% to 3.85%. In addition to these cuts, the PBoC also reduced its main short-term policy rate for the first time since August 2023, decreasing the 7-day reverse repo rate from 1.8% to 1.7%.
On the other hand, the potential for an impending rate cut by the Federal Reserve (Fed) could limit the USD’s gains against the CNH. New York Federal Reserve President John Williams indicated on Friday that while an interest rate cut might be justified in the coming months, it is unlikely to occur at the Fed’s July policy meeting.
Furthermore, Fed Governor Christopher Waller mentioned that inflation is expected to continue moderating towards the Fed’s 2% target in the coming months, suggesting that the time to lower the policy rate is approaching. According to the CME FedWatch Tool, the probability of a rate cut at the July meeting is below 5%, with a nearly full rate cut anticipated by September.
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