Main currency pairs little changed

Movements in the main currency pairs were modest enough yesterday. The euro and sterling both ended the day little changed against the dollar from Monday’s close, while EURGBP was also largely flat on the day. The flash PMIs for September were broadly in line with expectations in the case of the Euro area but weaker than forecast for the US and the UK, while pointing to modest growth in all three economies. Fed Chair Powell gave no nod in the direction of another rate cut as soon as next month’s meeting in remarks on the US economy but did say the current stance of monetary policy is “still mildly restrictive”, which leaves scope for a further reduction in rates. EURUSD and GBPUSD are trading at around $1.1790 and $1.3490 respectively this morning, down from highs yesterday of about $1.1820 and $1.3535, while EURGBP is trading at £0.8740, in sight of its high this year so far of about £0.8770.

The price action in government bond markets was limited enough. US and UK yields ended slightly lower on the day, by around 2-4bps across the curve, partly reflecting the softer PMIs, while German yields ended broadly flat. In equity markets, US stocks retreated from Monday’s all-time highs, with the Nasdaq leading the way (shedding almost 1%), while European indices ended with gains of around half a percent.

In updated economic forecasts published yesterday, the OECD says global GDP growth is projected to slow from 3.3% in 2024 to 3.2% in 2025 and 2.9% in 2026 “as higher tariffs and ongoing policy uncertainty slow down investment and trade.” Growth in the US is forecast to “fall sharply” from 2.8% in 2024 to 1.8% in 2025 and 1.5% in 2026 “owing to higher tariff rates, moderating net immigration and reductions in the federal government workforce,” while Euro area growth “experiences a slowdown from 1.2% in 2025 to 1.0% in 2026 with increased trade frictions and geopolitical uncertainty somewhat offset by stronger public investment and easier credit conditions.”

In his speech on the US economy, Fed Chair Powell said “increased downside risks to employment” prompted the central bank “to take another step toward a more neutral policy stance” by lowering interest rates (by 25bps  to 4-4.25%) at last week’s meeting. He also noted that the current stance of policy is “still modestly restrictive”, which leaves scope for a further reduction in rates to a neutral level, though he gave no indication the Fed might cut again as soon as next month’s meeting.

It is a quiet enough day ahead in terms of economic data with the Ifo index of business confidence in Germany and new home sales in the US the only releases of note. Fed member Daly speaks on the outlook for US monetary policy, while the BoE’s Greene speaks on monetary policy in the UK.