Dollar under pressure

The dollar has come under pressure after a surprise fall in consumer confidence in the US this month, which has led to some hardening of expectations for a 50bps rate cut from the Fed at its next meeting in November. The euro has strengthened to around $1.1190 (despite more poor economic data out of Germany), testing its highs of just over $1.12 in late August, while sterling has risen to about $1.3390, having briefly breached the $1.34 level. This in turn leaves the euro slightly firmer against the pound, trading just north of 83.5p this morning.

The market fully expects the Fed to lower rates by 25bps in November and is pricing in about a 40% chance of a 50bps cut. This is contributing to a continuing decline in US 2-year yields, which have fallen to almost 3.50%, the best part of 20bps below 10-year yields. The market has also raised the chances of an ECB rate cut at next month’s meeting – to around 60% – following a further decline in German business confidence this month – leading to a fall in German 2-year yields, currently hovering just below 2.10%. UK 2-year yields have lagged the move lower elsewhere, ending broadly flat yesterday.

Equity markets finished in positive territory yesterday, helped by China’s announcement of policy measures to support its economy, with European stocks gaining around 1% and the S&P 500 in the US closing at yet another new all-time high.

Consumer confidence in the US fell quite sharply this month according to the Conference Board’s latest survey, almost fully reversing the improvement seen in July-August, as “consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further.”

Business confidence in Germany fell for a fourth straight month in September to its lowest level since mid-2020, according to the latest Ifo Index, with firms’ assessment of current and future business conditions both deteriorating this month.

Looking to the day ahead, the economic data calendar is again pretty light with new home sales in the US the only release of note, while the OECD publishes its Interim Economic Outlook.

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