Consumer Confidence Decline Fuels Fed Easing Expectations
Adding to the pressure on the U.S. dollar and expectations for Federal Reserve easing was the release of the Conference Board's consumer surveys on Tuesday. The data revealed that consumer confidence fell significantly below forecasts, coming in at 98.7 compared to the anticipated 104 for the month. Attention also focused on the labour market differential metric, which tracks the gap between the percentage of consumers who believe jobs are plentiful and those who think jobs are hard to find. This gap continued to widen, suggesting a higher U.S. unemployment rate in the September jobs report, due next Friday.
The Federal Reserve had projected the unemployment rate to rise to 4.4% by year-end. If it exceeds this level, as the data indicates, the market may be justified in anticipating another 50 basis point rate cut during the Fed's November or December meetings.
Sterling's Bullish Momentum Continues in Q3
The strong performance of the British pound from the first half of the year has extended into the third quarter, supported by positive UK economic data, including this week's PMI reports. With expected growth differentials influencing G10 currencies, the pound has benefited from its attractive yield appeal. Additionally, heightened risk appetite has further boosted sterling. As a result, GBP/USD has risen above $1.34 and GBP/EUR above €1.20, both reaching over two-year highs.
This doesn’t rule out GBP/USD extending towards $1.35, but the upward momentum may begin to fade sooner, especially if we see increased FX volatility due to month- and quarter-end flows this week.
Euro Rebounds on China Stimulus, but Economic and Political Risks Loom
The euro bounced back after briefly dipping below $1.11 at the start of the week, lifted by improved global sentiment following China’s announcement of an economic stimulus plan aimed at meeting year-end growth targets. European stocks rallied, with the French CAC 40 climbing over 1% to a three-week high, driven by gains in the luxury sector, which stands to benefit from China’s recovery efforts. However, European bonds faced selling pressure amid this risk-on environment.
Despite the market’s positive reaction, underlying concerns about the Eurozone economy persist. Germany’s business outlook has deteriorated, with the Ifo institute’s expectations index falling to 86.3 in September, its lowest since February, while the current conditions index dropped to a four-year low of 84.4. These disappointing figures, along with weak flash PMIs and declining business and consumer sentiment across the Eurozone, have fuelled expectations of a European Central Bank (ECB) rate cut in October. The probability of a cut, reflected in the OIS curve, has risen from 40% to 63% this week, despite opposition from some ECB officials. While ECB’s Muller acknowledged the potential for a rate cut, he warned that there may not be enough data to support a definitive decision by next month.
Adding to the euro’s challenges is political uncertainty in France. The 10-year OAT-Bund yield spread has widened to 78 basis points, the highest since August, as investors grow concerned over France’s delayed budget and the threat of a no-confidence vote. Prime Minister Barnier’s government faces an October 1 deadline to submit the budget for parliamentary debate, with potential for further political instability. Additionally, Fitch and Moody’s are set to review France’s fiscal health on October 11 and 25, following an earlier downgrade by S&P Global. These factors are contributing to a higher risk premium for French debt and could weigh on the euro in the weeks ahead.
