September 24, 2024

“GBP/EUR continues to push through levels we haven’t seen since mid-2022, helped yesterday by some disappointing growth data in the eurozone. We are looking ahead to some key central bank decisions in Sweden and Switzerland over the next few days, as the calendar builds to the core PCE print on Friday.”

Sam Cornford – Head of Trading

USD

The dollar index is back to where it was before the Fed’s 50bp move last week, having caught a significant tailwind from a faltering euro yesterday as growth concerns mount on the other side of the Atlantic. That contrasted with some still solid activity data in the US, with the composite PMI figure remaining relatively stable at 54.4. Underneath, the services sector remains the engine of growth and manufacturing inched lower to a disappointing 47.0 (remember that anything above 50 denotes expansion; below means contraction). Fed speakers came out in droves yesterday with some varied commentary on the rate path – while Kashkari signalled a further two cuts in 25bp increments this year, for example, Goolsbee’s intensely dovish remarks called for ‘many more’ rate cuts to get ahead of the deterioration in the labour market, which he says often comes too quickly for officials to combat when it arrives. Today, consumer confidence is the only major data piece, where the consensus is for a modest uptick.

Meanwhile, there has been some big news in the Asia-Pacific overnight. After some speculation about a press conference yesterday, the People’s Bank of China announced a bucket of monetary stimulus measures in a last-ditch effort to achieve the country’s 5% growth target for this year. It includes a 50bp cut to the Reserve Requirement Ratio, a slash to mortgage rates, and some liquidity support for the flailing stock market. Rate cuts typically hurt a currency, but in this case, hints of a turning point for the world’s second-largest economy has catapulted sentiment, and USDCNH fell 0.5% on the news. The yuan’s strength helped accelerated a rise in AUD to a year-to-date high, which benefitted from the RBA’s commitment to its hawkish stance as it held rates overnight.

GBP

GBP/EUR pierced through 1.20 for the first time in two years last night, as sterling continues to benefit from divergence in both the growth and the interest rate stories. On the growth side, the UK economy has stretched its advantage further in September, despite modestly disappointing versus expectations in the PMI survey. Importantly, the 52.9 headline figure has a healthy cushion between it and contractionary territory, and it sits well above the eurozone’s now bitterly disappointing 48.9. At the same time, that reinforces the case for the ECB to come to the rescue with some rate cuts – something that the Bank of England does not need to be concerned about right now. Chancellor Reeves’s speech at the Labour Party conference in Liverpool yesterday said some of the right things to appease investors, including a promise not to return to austerity and some strong hints for higher capital spending to boost growth.

EUR

A worsening economic growth outlook dragged the euro lower across the board yesterday, demonstrated this time by a composite PMI index that fell into contractionary territory for the first time since February. The market appears to think that this will hold sway with ECB policymakers and increase the pressure for further easing, with the implied probability of an October rate cut rising from 35% to 56% as a result. That is despite some recent signalling from several central bank officials that have pointed to an almost zero chance that another moves comes as soon as next month. It is the German ifo business climate figure on the agenda this morning, where investors are expecting yet another soft number.

Markets

Stocks were fairly directionless yesterday and notched some marginal gains across the US and Europe, even as the European activity indicators disappointed markedly. However, Asian equities have rocketed to the highest in over two years this morning following the PBoC’s announcement of a bundle of monetary stimulus measures.

Main Economic Events (All Times CET)

10:00am: German ifo Business Climate
3:00pm: Fed’s Bowman speaks
4:00pm: US Consumer Confidence

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