The U.S. economy is showing strong growth, with a robust labour market and modest inflation on the rise, making it challenging for G10 currencies to gain ground against the dollar. Last week’s currency movements reflected this, with most currencies staying within 1% of their starting points, indicating that the market has priced in U.S. economic outperformance, making further dollar appreciation difficult in the near term.
This week, all eyes turn to Europe, particularly the ECB meeting on Thursday, where a rate cut of 25 basis points is widely anticipated due to signs of stagnation in the Eurozone. The market will closely monitor the ECB’s communication, especially regarding its concerns about recent economic indicators.
For the U.S. dollar, long-term interest rates have risen steadily since the Fed’s last rate cut, with recent inflation data supporting this trend. September’s core inflation exceeded expectations, and the three-month moving average is now closer to 4%. While this may not derail the Fed’s plans for rate cuts throughout 2024, it suggests that the bottom for U.S. rates may be near. This week, the focus will also be on Thursday’s retail sales report for insights into consumer demand.
In the Eurozone, disappointing economic data continues to weigh on the euro, although an upward revision to the September PMI has provided some relief. Investor sentiment may be influenced by China’s aggressive stimulus measures, even if initial reactions were underwhelming. The ECB’s messaging will be crucial; a lack of aggressive rate-cut commitments could help stabilise the euro.
For the British pound, recent declines have followed dovish comments from the Bank of England, but a bullish outlook persists due to attractive valuations, relatively high interest rates, and a resilient economy. This week’s labor data and the September inflation report will be significant tests for this view. Economists anticipate labour data consistent with full employment and inflation slightly above targets, both of which would support the pound. Additionally, the upcoming budget announcement from the new Labour government may introduce tax hikes, further impacting investor sentiment.
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