Dollar extends its gains
A slew of stronger than expected US economic data yesterday, including an upward revision to Q2 GDP growth and a fall in new unemployment claims, led to a further paring back of Fed rate cut expectations and broad-based gains for the dollar. This saw the euro and sterling fall to intra-day lows of around $1.1650 and $1.3325 against the US currency – and their lowest levels since early September and early August respectively – though both are a touch firmer this morning at about $1.1680 and $1.3355. The pound continued to drift down against the single currency, falling to a low for the day of around £0.8750, which is where it more or less remains this morning. The day ahead sees the release of PCE inflation data in the US, while the market will also be digesting Donald Trump’s latest missive on tariffs, which includes – from October 1st – a “100% tariff on any branded or patented pharmaceutical product, unless a company is building their pharmaceutical manufacturing plant in America.”
The paring back of Fed rate cut expectations – the market is pricing in not much more than one further 25bps cut before the end of this year, from closer to two cuts earlier in the week – saw 2-year US bond yields increase by around 6bps, while 10-year yields were about 3bps higher. UK bonds were the notable underperformer though, with yields 6-8bps higher across the curve, amid talk of a possible challenge to Keir Starmer’s leadership of the Labour Party, while German yields were marginally higher on the day. In equity markets, both European and US stocks ended lower yesterday, with both shedding around half a percent, though the former have opened in positive territory this morning notwithstanding the latest tariff stuff.
Regarding yesterday’s US economic data, second-quarter GDP growth was revised up to almost 1% quarter-on-quarter, from 0.8% in the previous estimate, mainly reflecting an upward revision to consumer spending growth. On a year-on-year basis, GDP growth in Q2 was unrevised at 2.1%, up slightly from 2% in Q1 (but a notable slowdown from growth of 3.1% in the year to Q2 2024). Meanwhile, the number of new jobless claimants fell for a second consecutive week last week with the latest data consistent with weak hiring but limited layoffs in the economy.
Today’s PCE inflation data in the US are expected to show the headline and core rates at 2.7% and 2.9% respectively in August, versus 2.6% and 2.9% in July. Other US data include consumer spending for August and consumer confidence for September, while the ECB publishes its latest consumer inflation expectations survey.