Euro Slides Toward Dollar Parity as Pound and Dollar Steady.

• Euro Decline: Morgan Stanley forecasts the euro could fall to $1.02 by year-end, driven by expected ECB rate cuts to tackle the weak European economy.
• Bearish Euro Outlook: David Adams from Morgan Stanley predicts deeper ECB cuts, with political instability in Europe, particularly in France and Germany, further pressuring the euro.
• Pound Gains: Strong UK employment and wage data boosted the pound against major currencies, although it remains under pressure from a strong US dollar.
• Bank of England Outlook: Economists expect the Bank of England to maintain a cautious approach with gradual rate cuts, which could support the pound against the euro and dollar.
• US Dollar Stability: The US dollar held steady after Monday’s gains, with traders awaiting upcoming CPI data and watching stable bond yields around 3.7%.

EUR: Morgan Stanley is predicting a steep decline for the euro, forecasting it could reach parity with the dollar within months as the European Central Bank (ECB) ramps up policy easing to tackle a struggling economy. The US bank expects the euro to fall to $1.02 by the end of the year, a 7% drop from current levels, according to David Adams, head of Group-of-10 foreign exchange strategy. This bearish outlook hinges on the ECB continuing with interest rate cuts over the next three meetings, including the possibility of a half-point reduction. While most analysts surveyed by Bloomberg predict the euro to rise to $1.11 by year-end, Adams’ stance is the most pessimistic. Traders are closely watching this week’s ECB meeting, with a quarter-point cut expected, but Adams warns of deeper cuts ahead, potentially leading the euro further down. The market currently expects about 60 basis points of easing from the ECB this year, compared to 110 basis points from the US. Adams believes rising political uncertainty in Europe, especially in Germany and France, could also contribute to the euro’s decline. He’s been recommending short euro-dollar positions since February, further bolstered by the upcoming US election in November, which he predicts will strengthen the dollar.

GBP: The British Pound gained against the dollar, euro, and other major currencies following strong UK employment and wage data. The pound-to-euro exchange rate climbed to 1.1847 after the UK added 265,000 jobs in the three months leading up to July, surpassing expectations of 123,000. The unemployment rate dipped to 4.1% from 4.2%, while wage growth remained robust at 5.1%. Despite the positive data, the pound-to-dollar rate remains under pressure due to the broader strength of the USD in September. The solid job and wage figures suggest that the Bank of England is likely to hold interest rates steady in the coming weeks, with a potential rate cut expected in October or November. Economists believe that high wage growth will continue to support inflation in the months ahead, leading to gradual rate cuts. According to Georgette Boele, Senior FX Strategist at ABN AMRO, the Bank of England’s cautious approach may allow the pound to outperform both the euro and the dollar. Michael Brown of Pepperstone notes that the Bank’s more gradual pace of rate cuts compared to the ECB and Fed could support the pound in the medium term.

USD: The US Dollar’s rally paused on Tuesday after a strong performance on Monday, with the USD Index holding steady above 101.50 following a 0.4% gain. The yield on 10-year US Treasury bonds remained stable, fluctuating around 3.7%. With limited economic data scheduled ahead of Wednesday’s Consumer Price Index (CPI) release, traders are cautious. China’s trade surplus widened to $91.02 billion in August, with exports rising 8.7% year-on-year and imports growing by 0.5%. However, the Australian dollar (AUD/USD) showed little reaction, trading modestly higher near 0.6670. In the UK, the Office for National Statistics reported a drop in the unemployment rate to 4.1%, while wage inflation softened to 5.1%, in line with expectations. The GBP/USD pair recovered to near 1.3100 after hitting a multi-week low earlier in the day. Meanwhile, Germany’s inflation rate remained at 1.9% year-on-year in August. After two days of losses, the EUR/USD held steady around 1.1050. USD/JPY saw gains, continuing its upward trend from Monday, trading near 143.50. Gold prices also edged higher, closing above $2,500 on Monday.