Some generally strong economic data out of the US buoyed the dollar last week, while causing markets to soften bets in support of Federal Reserve rate cuts.
Spending remains healthy and consistent with decent growth, in spite of the slowing labour market. With little sign of economic acceleration across the Atlantic the resulting rise in US rates was enough to push the dollar higher against all major currencies. The upcoming ruling on the legality of Trump's firing of Fed Governor Cook, and its implications for Federal Reserve independence, remain a tail risk for the greenback, but for now the main alternative to the US dollar appears to be gold, rather than other currencies.
Under normal circumstances, the focus this week would have been on the all important nonfarm payrolls report on Friday, but US politics may once again steal the spotlight. A potential government shutdown if the 1st October deadline for a funding bill is breached may result in the delay of the report's release. The flash September inflation report out of the Eurozone (Wednesday) will be the other focus for traders. In the UK, fragile bond market sentiment will keep the spotlight on internal Labour politics and their impact on the deficit and the upcoming budget statement.
GBP
The PMIs of business activity suggested a loss of momentum in the UK economy. Both the services and manufacturing indices fell well short of expectations, and while we are seeing modest growth in the former, the contraction in the latter is accelerating. Gilt yields continue to hover near multi decade highs, as markets remain wary of the willingness and ability of the Labour government to close the fiscal gap. Further tax hikes at November’s Autumn Budget appear increasingly on the cards.
The main support for sterling comes from the highest interest rates in the G10, but even here the story is not all positive: this reflects the clear stagflationary state of the UK economy, which limits the ability of the Bank of England to provide monetary stimulus without spooking the bond market. We continue to see no further cuts from the MPC in 2025.
EUR
The PMI numbers out of the Euro Area last week were consistent with sluggish growth, with slight contraction in the manufacturing sector compensated by somewhat livelier services data. As to the former, we are yet to see any clear signs of impetus from the massive German stimulus package announced almost six months ago, which is not overly surprising given the time lag inherent in fiscal stimulus, particularly infrastructure spending - we are not expecting this to be reflected in the data in ernest until early 2026.
Euro Area inflation expectations have edged up, and though they remain relatively contained, this probably means that further European Central Bank rate cuts are off the table. September inflation data on Wednesday should be a non-event. The core inflation rate, which is arguably the most closely watched of the two by ECB officials, is expected to remain unchanged slightly above the bank’s target for the fifth consecutive month.
USD
Second-quarter GDP growth was revised higher last week, and home sales, durable goods orders and personal income and spending all came out stronger than expected. The US economy seems to be growing at a steady rate even while the labour market creates few jobs, a sign that the employment slowdown has more to do with supply (lowered by the immigration crackdown and demographics) than a faltering economy.
A spate of labour market reports culminating in the September payrolls number on Friday will add further clarity to the state of the jobs market, but the likely lack of a bipartisan accord to increase the debt limit may interfere with economic releases out of the US. This is likely to add a further sense of political chaos and institutional degradation, which could put pay to some of the recent dollar strength.
Deep dives and expert insights:
- G10 currency market report- Get the latest analysis on major currencies.
- Asia FX Outlook - September 2025
