USD
In the United States, debate around monetary policy has sharpened after Stephen Miran’s objection to the Federal Reserve’s latest decision. He argues that the Fed has held policy too tight and has floated the idea of a two percentage point reduction in the federal funds rate. His stance is built on an updated interpretation of the Taylor rule and hinges on structural factors such as immigration, trade realignments, and fiscal expansion, which he believes have pulled down the neutral interest rate.
Not all members of the Fed share this view. Some, like St. Louis Fed President Alberto Musalem, support rate cuts as a safeguard against weakness in the jobs market but are cautious about going further. Others, such as Atlanta’s Raphael Bostic, project only a single cut for 2025, reflecting a restrained approach. Critics of Miran argue his proposals are speculative, particularly his dismissal of tariffs as inflationary drivers. His profile, however, is growing quickly, especially with the position of Fed Chair soon to be reconsidered.
GBP
Sterling continues to trade around 1.35 against the US dollar, close to its decade average, while slipping towards 1.14 versus the euro. The flash PMI readings are in sharp focus, especially services, which dominate the UK economy. A stronger than expected outcome would give the pound some short term lift, while disappointment could compound existing concerns over stagflation.
Recent headwinds have included weak borrowing figures, concerns about fiscal management, and surging long dated gilt yields, which climbed to levels last seen in the late 1990s. These moves reflect worries about government debt dynamics and reduced demand from traditional long term buyers. The Bank of England has slowed the pace of quantitative tightening, cutting its annual target from £100 billion to £70 billion and shifting bond sales toward shorter maturities. The government has also pared back issuance of longer term debt.
Nevertheless, there are glimmers of resilience. UK data point to a stabilisation in parts of the economy, fundamentals appear firmer than sentiment suggests, and positioning against sterling remains heavy. This creates scope for the Autumn Budget to provide a positive catalyst, though with the announcement delayed until late November, uncertainty lingers.
EUR
The euro moved higher by around 0.5% yesterday, with demand building near 1.1785 against the dollar. The broader tone remains constructive, although limited by the Federal Reserve’s cautious stance. Markets are particularly sensitive to central bank commentary this week as both the Fed and the European Central Bank have adjusted course only recently.
ECB officials have struck a confident note, with Joachim Nagel downplaying fears that a stronger euro could harm exports. Data also surprised to the upside, with consumer confidence improving in September to -14.9 compared with expectations of -15.3. Eurozone PMI releases today are unlikely to shift the currency dramatically, with investors still guided more by developments in US policy communications.
Looking ahead
Attention will remain fixed on PMI data from both the euro area and the UK, which provide early insight into growth momentum. In the UK, services activity will be particularly important for gauging inflation expectations and shaping Bank of England policy. For the euro, the narrative continues to be shaped more by shifts in the Fed’s tone than by regional data. In the US, Miran’s unconventional views have unsettled the policy debate, and any shift in Fed guidance will be closely watched. Overall, the coming weeks are set to bring further volatility as markets balance contrasting central bank signals with fragile fiscal backdrops.
