he Fed cut rates as expected, but suggested that it is now in a wait-and-see mode and that absent downside surprise in the data, it expects at most another cut over the following months. Yields in US fixed income spiked higher and dragged the dollar along with them. The greenback finished the week up against every major peer except the Russian Ruble, which celebrated higher oil prices and was the top performing major currency worldwide.

This week, attention shifts back to the economic release calendar. Contrary to our expectations, the PMI indices of business activity in the Eurozone surprised to the downside this morning, adding to concerns regarding the health of the Euro Area economy. We also await today’s PMI data for the US as well as the series of US inflation gauges, with the latter being released later in the week.

GBP

The Bank of England September meeting came and went, the MPC remains on hold, and the markets shrugged and largely ignored it, instead focusing on Brexit. The news on this front continues to tilt to positive.The implied probability of a no-deal Brexit in 2019 currently stands at around 20-25% according to most bookmakers. The Parliament has passed a bill forcing the Government to request a deadline extension if Parliament doesn’t agree to a deal. Our baseline scenario is still that the deadline is postponed and the issue is decided (or not!) in a new general election soon after. No news is expected here this week, so we expect the Pound to trade off events elsewhere.

EUR

The Euro faced its first big post-ECB meeting test today when the PMI indices were released. Contrary to our expectations both activity indices declined from last month, with the composite falling to just 50.4, its lowest level in six years. While no other news of note is expected this week, we are encouraged by recent political noises in Germany towards a more stimulative fiscal stance, particularly in regards to financing the transition to a greener economy. Any news on this front could also be a positive for the euro.

USD

Economic newsflow continues to trend positive in the US. The Fed indirectly acknowledged this by accompanying the expected rate cut with a more optimistic assessment of the economy than it had been implying in the past few weeks. We think markets are still overestimating the chances of any further cuts in the US. In particular, the upward trend in core inflation that we are seeing is not consistent with further monetary stimulus. We will be paying close attention to the other inflation measure (PCE) that comes out this week to see if the upward trend is also visible there. If so, we would expect US bond yields to continue their march higher.