September 23, 2024

“A weakening eurozone growth outlook is weighing heavily on the euro this morning, and that’s having some spillover effects on sterling as we wait for the PMIs in the UK and the US today.”

Tim Hallinan – Trading Director

USD

The dollar’s post-Fed downturn stabilised towards the tail end of last week and there has been some recovery this morning ahead of some important PMIs. Today’s business activity surveys are a timely test for some of the narratives driving FX – remember that the current dollar softness is a result of both a dovish Fed and the boost to risk sentiment coming from rising conviction in the soft landing narrative. The market is expecting some further evidence of US growth resilience with a 54.3 composite figure, but once again it is services picking up the slack for a manufacturing sector in retreat. Bostic, Goolsbee, and Kashkari from the Fed all speak this afternoon and they could shift some of the pricing in the rates markets, where traders are already pricing in a second 50bp move at a coin flip in November. Later in the week, we get some final Q2 GDP data on Thursday and the August core PCE inflation print on Friday, which should keep markets in

GBP

Some weak PMI numbers in France and Germany so far this morning have dragged GBP/USD down from its 30-month highs, but lifted GBP/EUR again to its highest level to August 2022. The long unseen 1.20 level is quickly approaching if the recent narrative from the PMIs – that of a diverging UK-eurozone story as British growth outpaces the continent – can hold when the UK numbers come out this morning. The consensus is for a slight cooling in the composite figure from 53.8 to 53.5 but for both the manufacturing and services sectors to remain in expansionary territory (i.e. above 50). While a more cautious stance from the Bank of England remains sterling’s primary bullish driver, it is safe to say that it would not be trading quite as high as it is without this year’s improvement in the growth differential.

EUR

The PMI survey data released this morning has not been pretty, and the euro is down over half a percent as a result. Both France and Germany have disappointed across the board in September, and the economic rebound from the first half of the year appears to be evaporating more quickly than expected. The French economy has flipped from an Olympics-related growth boost in August at 53.1 to a miserable, contractionary 47.4, while the German economy has slipped further into the wrong side of the 50.0 mark. That has dragged eurozone business activity back into contraction for the first time since February. Interestingly, the weaker growth outlook has had little impact on the perceived likelihood of an October rate cut so far, with one still priced at 35%.

Markets

A jumbo rate cut and the Fed’s wholehearted endorsement of the soft landing narrative was enough to power a rally in risk assets last week. The S&P 500 surged 1.4% and the Euro STOXX 50 rose by 0.6%, while oil climbed 4% on hopes that the beginning of Fed rate cuts would begin to lift global demand. Japan’s Nikkei has also been strongly benefitting from a weaker yen, having moved up around 3.7% in the past two sessions.

Main Economic Events (All Times CET)

10:00am: Eurozone Flash PMIs
10:30am: UK Flash PMIs
2:00pm: Fed’s Bostic speaks
3:45pm: US Flash PMIs
4:15pm: Fed’s Goolsbee speaks

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