Dollar regains some more ground

It was something of  a “game of two halves” across bond, equity, and currency markets last week. In FX, the dollar fell to its lows for the week on Wednesday following the Fed’s rate cut before rebounding strongly on Thursday-Friday. This saw EURUSD end the week largely unchanged from the previous Friday’s close at just under $1.1750 but a good bit off its fleeting high of circa $1.1920 immediately following the Fed rate announcement. Sterling finished about three-quarters of a cent lower on the week against the dollar at $1.3475, well down from Wednesday’s (post-Fed) high of $1.3725, and about three-quarters of a penny lower against the euro at around £0.8720, with Friday’s worse than expected UK government borrowing figures for August adding to the currency’s decline at the end of  the week. For the coming week, the economic data calendar is relatively light (particularly outside the US) with flash PMIs for September in the main economies (Tuesday) and PCE inflation for August in the US (Friday) the main releases of note. There is plenty of “Fed-speak” over the course of the week though, including Chair Powell on Tuesday, to keep markets interested.

Now that the latest central bank meetings are out of the way, market expectations for rates are not much different from those prevailing before the meetings, with the Fed seen cutting by another 50bps (to 3.5%-3.75%) by next January at the latest and by a further 50bps by July; the ECB on hold with some chance of one final cut (to 1.75%); and the next 25bps cut from the Bank of England (to 3.75%) not fully priced in until April next year with some chance of a further quarter-point reduction by end-2026. Perhaps reflecting this, short-dated bond yields across the main markets were not much changed last week either, though they ended off their mid-week lows, while yields further out the curve rose by 5-7bps. In equity markets, the S&P 500 closed at a new all-time high on Friday on the back of gains of just over 1% on the week, while the Euro Stoxx 50 advanced by a little over 1% as well.

Fed member Kashkari says he supports another 50bps reduction in interest rates by the end of this year, which is in line with the median projection in the Fed’s latest ‘dot-plot’. He believes the risk of a “rapid further weakening of the labour market” is greater that the risk of  “a large upside inflation surprise”, noting that economic cycles show that “when labour markets weaken, they can weaken quickly and non-linearly.”

ECB’s Stournaras says the central bank is in “a good equilibrium” in terms of interest rates – which is the consistent message coming from ECB members – and that “it would take a substantial change in our outlook to change our position.” The ECB latest forecasts show inflation in the Euro area is expected to run close to, albeit slightly below, the 2% target over the next couple of years.

It is very quiet today in terms of economic data today with consumer confidence in the Euro area the only release of note. As mentioned, flash PMIs for September are due in the main economies tomorrow, while a final estimate of US third-quarter GDP is scheduled for Thursday ahead of the PCE inflation data on Friday.