US Dollar Index Sees Biggest Daily Rise Since June, But Short-Term Outlook Remains Bearish
On Wednesday, the US dollar index experienced its largest daily increase since June, driven by the 10-year US Treasury yield rising above 3.8%, the highest in three weeks. Despite this, the narrative of a soft economic landing persists, and markets continue to anticipate more aggressive rate cuts by the Federal Reserve (Fed), suggesting that the dollar may face downward pressure in the short term.
Attention now shifts to today's US GDP data and weekly unemployment claims. Tomorrow, the focus will be on the core PCE deflator, the Fed's preferred inflation gauge. A low reading, such as 0.1% month-over-month, could further weaken the dollar.
Pound Outlook Bullish Amid Strong Growth and Yield Differentials
The pound continues to benefit from favourable growth and yield differentials, with a short-term target of $1.35 for GBP/USD. Its high sensitivity to risk supports its strength as long as global risk appetite remains positive, bolstered by China’s recent stimulus measures. However, with the US election just over a month away, demand for the safe-haven US dollar could rise due to uncertainty over the outcome.
Against the euro, sterling is set for its seventh straight monthly gain, marking its longest winning streak against the common currency. As the quarter ends this week, some volatility in foreign exchange markets could emerge as portfolio managers rebalance their positions.
European Equities Face Continued Losses Amid Market Fatigue
European equities fell for the second straight day, with the Stoxx50 struggling to break through the 4950 level. A month ago, we noted the risk of market fatigue, suggesting that 5000 could act as a ceiling for gains, a scenario that has now played out. Despite a 7% rebound since the August low, European equities remain in a broad downtrend since the May peak, driven by weakening macroeconomic fundamentals that have made euro-denominated assets less appealing. Looking ahead, the market is entering a period that has historically seen significant downturns, potentially posing challenges as we head into Q4.
