U.S. Dollar Gains Strength as Expectations for Milder Rate Cuts Firm Up
GBP
GBP/USD has dipped and is currently trading at 1.3131 (interbank), while GBP/EUR stands at 1.1876 (interbank).
This morning, UK manufacturing continued its recovery in August, as confirmed by a report from S&P Global on Monday. The manufacturing Purchasing Managers' Index (PMI) remained unchanged from the preliminary estimate at 52.5, up from 52.1 in July, marking a 26-month high.
Additionally, the Pound held steady as recent remarks from BoE Governor Andrew Bailey fueled expectations of divergent unwinding cycles among major central banks in the coming months, with the BoE anticipated to pursue a less aggressive policy-easing cycle compared to its peers.
Markets seem largely unaffected by UK Prime Minister Keir Starmer’s recent warning of a potentially ‘painful’ Autumn Budget this year.
Data releases from the UK are sparse this week, with the latest Purchasing Managers' Index (PMI) data set to be released throughout the week.
Today’s Events (GMT+1):
09:30 - Manufacturing PMI (Aug) - Forecast: 52.5
EUR
EUR/USD has fallen and is currently trading at 1.1076 (interbank).
This morning, Germany's manufacturing sector, which makes up about a fifth of Europe's largest economy, continued to decline in August, according to a survey published on Monday. The Purchasing Managers' Index (PMI) for German manufacturing dropped to 42.4 in August from 43.2 in July, slightly above the preliminary flash estimate of 42.1 but still below the 50 threshold that separates growth from contraction.
Moreover, the European Purchasing Managers' Index (PMI) inched up to 45.8 from the previous figure of 45.6 but remains in contraction territory.
ECB Governing Council member François Villeroy de Galhau indicated on Friday, according to Bloomberg, that there are "strong reasons" for the central bank to consider reducing its key interest rates in September. Villeroy de Galhau suggested that action should be taken at the upcoming meeting on September 12, noting it would be both fair and prudent to decide on a new rate cut.
Further PMI data will be released throughout the week, along with the Gross Domestic Product figures due on Friday.
Today’s Events (GMT+1):
09:00 - German Manufacturing PMI (Aug) – Actual: 42.4 vs Forecast: 42.1
09:00 - Manufacturing PMI (Aug) - Actual: vs Forecast: 45.6
USD
The U.S. dollar index, which measures the currency against a basket of six major currencies, is currently at 101.64, having briefly touched 101.79, its highest level since August 20th.
The dollar has strengthened to its highest level since August 20, supported by a rise in long-term Treasury yields, which reached their highest point since mid-August, as inflation data suggested a smaller rate cut and GDP figures showed the economy was robust enough to allow the Federal Reserve to take a more cautious approach to easing its policy.
Last week, the personal consumption expenditures price index—a key inflation measure—remained steady at 2.5% year-on-year for July, matching economists’ forecasts of 2.6%. The core PCE, excluding volatile food and energy costs, held at 2.6%.
U.S. payroll data, due on Friday, will be critical after Federal Reserve Chair Jerome Powell shifted from focusing solely on inflation to expressing concern about potential job losses.
Traders currently estimate a 33% chance of a 50-bps Fed rate cut this month, while a quarter-point cut is fully priced in. A week earlier, expectations were at 36% for a larger cut.
No significant events are scheduled for today
CAD
USD/CAD is trading higher, currently at 1.3471 (interbank).
Canadian GDP for the second quarter increased to 0.5% from the previous 0.4%.
Last week, Annualized Canadian Q2 GDP rose to 2.1% from 1.8%, surpassing the anticipated drop to 1.6%. Despite the overall positive swing, MoM GDP stalled, showing no growth at 0.0% compared to the previous 0.2% and missing the market forecast of 0.1%.
On Wednesday, the Bank of Canada will announce its latest interest rate decision. Investors are anticipating another 25 basis point rate cut, which would lower the Overnight Policy Rate to 4.25% and mark the third consecutive rate cut by the central bank.
The BoC’s key interest rate currently stands at 4.5% following quarter-point cuts in June and July, and Canada’s annual inflation rate fell to 2.5% in July, solidifying expectations for another rate cut on Wednesday.
Additionally, crude oil prices are lower this morning, with Brent crude at $76.82 per barrel and West Texas Intermediate (WTI) also down to $73.51 per barrel.
No significant events are scheduled for today
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