Dollar gains some more ground

Comments by ECB President Lagarde  – pointing to a rate cut later this month – and Fed Chair Powell – indicating no rush to lower rates quickly – are weighing on the euro, which has slipped to around $1.1120 against the dollar and to £0.8330 against sterling, down from its best levels yesterday of about $1.12 and £0.8360. The pound has also lost some ground to the dollar, dipping to around $1.3350 from highs yesterday of about $1.3425. Euro area inflation data for September are due this morning, although Lagarde may have already stolen their thunder.

Following these latest comments from the central bank chiefs, the market is now pricing in about a 90% chance of a quarter-point rate cut at this month’s ECB meeting and has lowered the chances of a 50bps cut from the Fed in November to around 20%. The comments also contributed to some volatility in bond markets, but in the end, German 2-and 10-year yields ended slightly lower on the day while equivalent US yields finished about 8bps and 4bps higher respectively.

In her speech to the European Parliament yesterday, Lagarde said survey indicators (notably the latest PMIs) suggest that the economic recovery in the Euro area “is facing headwinds,” while at the same time disinflation has been accelerating recently. The latter has strengthened the ECB’s confidence that inflation will return to target in a timely manner, which Lagarde said the ECB “will take…into account in our next monetary policy meeting in October” (strongly pointing to another rate cut then).

Fed Chair Powell talked up the US economy and labour market in his remarks yesterday and said that, with an “appropriate recalibration of our (monetary) policy stance”, strength in both can be maintained. He added that the Fed is not in a hurry to lower interest rates “fast” and indicated that a 25bps cut (rather than 50bps) is more likely if it decides to move again at its November meeting.

Euro area inflation data for September due this morning are expected to show the headline rate falling to 1.8% (below the 2% target) from 2.2% in August, according to the consensus forecast, while the core rate is seen edging down to 2.7% from 2.8% (with services inflation likely to have nudged down from last month’s 4.2%). According to Lagarde, headline inflation may “temporarily increase” in the final quarter of this year before falling back again during 2025.

Other data due today include job openings and the ISM manufacturing index in the US as well as final manufacturing PMI readings for September in the main economies. Today is also Budget 2025-day in Ireland, with a tax and spending package of €8.3bn, together with “one-off” measures expected to amount to some €2.0bn, on the cards.