Election Odds Shift, Dollar Declines

The initial presidential debate between former President Donald Trump and current Vice President Kamala Harris in Philadelphia has concluded. Many policy questions remain unresolved as both candidates tentatively agreed to another debate before 5th November. Interestingly, Taylor Swift’s endorsement of Kamala Harris, who is perceived to have slightly outperformed Trump in the debate, may have influenced voter intentions more than the debate itself. Markets seem to concur. Betting markets now show a slight preference for Harris (56-52%) over Trump (48-44%) in winning the election, leading to a decline in the dollar and US equities during the Asian trading session. Trump is currently viewed as more favourable for these assets due to his tax reduction policies and additional tariffs.

Government bond yields have continued to decline this week. The 2-year Treasury yield dropped to 3.57%, nearing its low from September 2022. Fed futures are leaning towards a 25 basis point cut next week, with the probability of a larger cut increasing slightly from 30% to 35% since yesterday. Today’s eagerly awaited CPI report could slightly adjust these probabilities. Inflation is expected to have decreased from 2.9% to 2.6% in August, with the core rate remaining at 3.2%. With no Fed commentary due to the blackout period, investors will interpret the data independently.

Bank of Japan officials maintain their hawkish stance, suggesting a potential rate hike before the end of the year. This anticipated policy normalisation, combined with US yields falling to 17-month lows, has pushed USD/JPY to a new 2024 low of 140.50¥. The Japanese yen is currently surging in FX markets, having appreciated against 98% of global currencies since the start of the second half of 2024. Looking ahead, risks for the yen are more balanced. Asset managers have turned net-bullish on the currency for the first time this year, and with 270 basis points of Fed cuts already priced into futures for the next 24 months, there is limited room for further dovish repricing. A gradual appreciation to below the 140¥ mark remains our baseline.

Pound Declines as Growth Stagnates

The UK economy remained stagnant in July, mirroring the previous month’s performance and falling short of market expectations across all key sectors. Services output increased by 0.1%, following a 0.1% decline in June, but a 0.8% drop in production output, driven by weakness in manufacturing, resulted in no overall growth for the month. Construction output also contracted by 0.4%, after a 0.5% rise in June. Over the three months to July, UK GDP grew by 0.5%, with widespread growth in the services sector, though it still missed forecasts and is tracking the slowest quarterly pace this year.

As UK markets open, we expect rates to trend lower as traders react to the disappointing data, with some bets on rate cuts potentially added into the OIS curve. However, we do not believe this significantly changes the Bank of England’s near-term outlook. We expect the BoE to remain the most hawkish among G3 central banks, refraining from cutting policy rates in next week’s decision, where the probability of a rate cut has stayed around 20% over the past month.

Despite the weaker data, the pound was initially unaffected, buoyed by a midnight boost from US election polls showing Kamala Harris rising to 56% in prediction markets, but eventually lost the early gains. We anticipate a muted reaction from the pound ahead of the US CPI release later today. However, once that hurdle is cleared, we foresee some weakening of the pound due to the disappointing growth outlook.

Euro Gains from US Presidential Debate

The euro received an early morning boost following the US presidential debate, having previously fallen to a 3-week low of $1.103 in the prior session, as investors grew increasingly cautious ahead of key risk events this week. European equities pulled back on Tuesday, reducing the week-to-date gains by three-quarters, while bonds remained in demand. The two-year Bund yield fell to a more than seven-month low of 2.14%, underperforming US Treasuries.

On the domestic macro front, there was little to move markets, as the final German CPI for August matched preliminary readings at 1.9% year-on-year. More notably, VW ended its three-decade-old German jobs guarantee, which will effectively cease by mid-2024, in an effort to cut costs. This follows last week’s announcement of potential plant closures in Germany, the first such move in 87 years. The end of job security commitments highlights how far Europe’s largest economy has fallen behind in terms of competitiveness.

The domestic calendar remains quiet today, with the main macro focus being tomorrow’s ECB rate decision. As traders hold off ahead of the US core CPI release later today, we expect subdued spot volatility until the event. Given that the Fed has unofficially signalled a rate cut in September and overnight volatility is trading in line with recent levels, we do not anticipate significant market movements outside of the usual post-data fluctuations.

British Pound Eases From 5-Month High as Markets Await Key Data

The British pound is gradually pulling back from its five-month high of $1.3270, which it hit against the US dollar at the end of August. Global sentiment has improved following Friday’s weaker-than-expected US job report, which sent ripples through financial markets. However, Sterling has yet to gain any upward momentum this week. Investors are holding back as they await critical economic data ahead of the Federal Reserve (Fed) and Bank of England (BoE) decisions later this month, with caution prevailing around pushing the pound above the $1.31 level.

Today's UK employment figures closely matched expectations, providing little incentive for significant market repricing. Unemployment dropped by 73.6k, lowering the rate to 4.1% in the three months to July. Meanwhile, average earnings growth moderated more than anticipated, falling from 4.6% to 4.0%, with earnings excluding bonuses slowing from 5.4% to 5.1%. Overall, the data does not appear to support any imminent policy easing from the Bank of England, with the probability of a rate cut in September currently around 22%. Markets are pricing in just one rate cut, which we believe is too hawkish. However, declining inflation and wage growth toward year-end could pave the way for an additional rate cut.

With labour market reports from both the US and UK now behind us, investor focus is shifting to upcoming GDP and inflation data. Tomorrow’s release of UK GDP, goods trade, industrial production, and manufacturing production figures will be followed by US inflation data, which could determine whether the Fed opts for a 25 or 50 basis point rate cut next week. Implied one-week volatility rates for GBP/USD and GBP/EUR have recently settled at their 2024 averages of around 6.4% and 4.4%, respectively. As global equities enter a seasonally weaker phase and with key rate decisions and the US election approaching, investors may be underestimating the potential risks in foreign exchange markets.

Global Equities Find Strength Amid Hopes for Central Bank Intervention

Global equity markets began the week on a stronger note, with dip-buying behaviour persisting as investors remain hopeful that central banks will step in before growth concerns take hold. Last week, the Bank of Canada implemented its third rate cut of the year, while the European Central Bank (ECB) is set to make its second cut on Thursday.

The US dollar followed bond yields higher in anticipation of tonight's presidential debates and Wednesday's critical CPI report. The Greenback has been on a steady decline, dropping about 4% since early July and turning negative for the year. Falling bond yields and heightened expectations of Federal Reserve easing have weighed on the appeal of the dollar, reinforcing a medium-term negative outlook. In the short term, further below-consensus economic data would be needed to push pairs like EUR/USD and GBP/USD higher. Inflation, expected to fall from 2.9% to 2.6% in August, is unlikely to support the dollar this week. With markets already factoring in a 25-basis-point rate cut, a downside surprise in inflation would likely have a greater market impact than an unexpected upside.

EUR/USD Faces Key Test Ahead of ECB Decision and US Election Debate

EUR/USD is holding near the $1.104 support level, but this support may soon be challenged. With few domestic macroeconomic events scheduled before Thursday's European Central Bank (ECB) rate decision, tonight's US election debate could provide the first major catalyst of the week. While one-week risk reversals narrowed significantly during yesterday’s session, they remain slightly tilted in favour of euro calls, indicating a marginal bias toward further euro strength.

Global Markets Slide Following Disappointing US Jobs Data

Global stocks dropped sharply on Friday after a weaker-than-expected US jobs report heightened concerns of an economic slowdown. The August non-farm payrolls report showed 142,000 new jobs, falling short of the forecasted 165,000. Additionally, the previous two months’ figures were revised downward, with July's numbers reduced from 114,000 to 89,000, and June’s from 206,000 to 179,000.  US stock markets reacted negatively to the news, with the S&P 500 falling by 1.7% and the Nasdaq dropping 2.6%.

Key US Inflation Data and Central Bank Decisions to Shape FX Markets This Week

FX markets will be influenced by critical economic data releases and central bank announcements this week, with a focus on the US Consumer Price Index (CPI) and the European Central Bank's (ECB) policy decision.  The US CPI data for August, scheduled for release on Wednesday, will offer crucial insights into inflation trends in the world’s largest economy.  On Thursday, the ECB’s rate decision will be closely monitored as investors gauge the bank’s approach to managing inflation and fostering economic growth in the Eurozone.  The ECB is anticipated to lower rates by 25 basis points, with the main attention focused on the communication and specifics of the ECB staff projections.

In Asia, China's inflation and trade balance figures, due Tuesday, will provide key indicators of the health of the region’s largest economy and its potential effects on regional currencies.

British Pound Gains Strength Ahead of Key Economic Data

GBP has shown resilience, bolstered by positive economic data suggesting accelerated growth over the summer. This momentum, along with the Bank of England’s cautious stance on further rate cuts, has driven GBP/USD close to the $1.32 mark, nearing 30-month highs. Despite the uptrend, resistance is noted at $1.3265, while support holds at $1.3050.

The pound posted its strongest gains against commodity currencies, particularly the AUD, NOK, and NZD, but underperformed against safe-haven currencies like the Japanese yen and Swiss franc, resulting in the Pound Index closing 0.2% lower for the week. Meanwhile, the pound has recovered its August losses against the euro, approaching the mid-€1.18 level, edging near 2024 highs. However, seasonality trends for the second half of the year are typically unfavourable for the pound, which could limit further gains, even with the ECB potentially shifting its focus to growth concerns. Notably, one-week EUR/GBP implied volatility has hit a three-week high ahead of the ECB rate decision.

Upcoming data releases, including UK employment figures on Tuesday and July’s GDP data on Wednesday, will play a key role in determining the pound’s short-term trajectory.

US Dollar Declines Amid Weaker-than-Expected Labour Market Data

The US dollar weakened overnight after a softer-than-anticipated US labour market report heightened investor concerns ahead of the crucial non-farm employment figures due later today. The August ADP employment report showed an increase of just 99,000 jobs, falling short of the 144,000 forecast and lower than July's downwardly revised figure of 111,000.

Looking ahead to today’s key US jobs report, expectations are that non-farm payrolls growth will edge up slightly to 130,000 in August. While the pace of job growth is slowing, July's sharp drop may have been exaggerated by temporary weather conditions, which are expected to normalize this month.

The unemployment rate is projected to stabilize at 4.2%, following a four-month rise. Although the rate may gradually increase due to slowing hiring, it is expected to do so steadily, barring significant layoffs. Several factors, including the broader economic environment, inflation trends, and the current market expectations for Federal Reserve actions, will influence how much further the US Dollar Index (DXY) could decline.

Euro Area Q2 2024 GDP Growth Projected at 0.3% QoQ

The euro area’s GDP growth for Q2 2024 is expected to come in at 0.3% quarter over quarter. This forecast includes an anticipated 0.1% decline in consumer spending and a 0.6% drop in fixed investment.

On the other hand, government spending is projected to rise by 0.6% for the quarter. Importantly, net trade—driven primarily by peripheral nations—is expected to contribute +0.4 percentage points to the overall GDP growth.

The euro has remained resilient during the US dollar's recent weakening phase, with the currency showing strong performance in Asian markets. However, in EUR/USD, significant resistance lies in the 1.125–1.1297 range, which could limit the euro's further gains in the near term.