EURUSD softer at start of the week

Sterling closed out Friday close to its highs for the week against the dollar – which was under pressure generally following the Fed rate cut – and the euro, while it kicks off this week trading at around $1.3280 and £0.8380 respectively. The euro gained almost a cent against the US currency last week, finishing at around $1.1160, but it has slipped to $1.1120 this morning after softer than expected French and German PMI data for September released earlier. It is relatively light in terms of economic data this week, with flash PMIs for the Euro area, UK and US today and US PCE inflation on Friday the most notable releases.

Following the latest round of central bank meetings, the market expects the Fed to lead the way in terms of the scale of rate cuts over the coming quarters – albeit not by much – with almost 70bps priced in by the end of this year and another 100bps or so expected over the first half of next year. The ECB and BoE are seen cutting rates at least once more this year, by 25bps, with a good chance (circa 50%) of a second quarter-point move, and lowering them by  around 95bps and 85bps respectively in H1 2025.

In government bond markets, US and German 2-year yields finished broadly flat on the week on Friday but 10-year yields ended 10bps and 5bps higher respectively, while UK bonds underperformed with 2- and 10-year yields increasing by 10bps and 15bps respectively on the week. In equity markets, European stocks shed around 1.5% on Friday’s (giving up a good chunk of Thursday’s gains), while US indices ended flat to marginally lower on the day.

ECB member Rehn said on Friday that the central bank has “a clearly easing direction for its monetary policy, with the pace (of rate cuts) dependent on fresh economic data,” while noting that there are “material” downside risks to the economic outlook for the Euro area.

Looking to the day ahead, as noted above, flash PMIs for September are due in the Euro area, UK and US.