Markets Brace for Rate Cuts.

• Euro Rate Cuts: The ECB is expected to cut rates by 25bps, but traders are more focused on future guidance, which President Lagarde will likely leave data-dependent.
• Market Expectations: Markets anticipate more aggressive ECB rate cuts, with a 40% chance of another cut in October, potentially strengthening the Euro if bond yields rise.
• Dollar Rebound: The USD bounced back after inflation data showed a 0.3% rise, solidifying expectations for a 25bps Fed rate cut, though further cuts limit any major Dollar rally.
• Pound Pressure: The Pound weakened after UK GDP data showed no growth, but limited BoE rate cut expectations helped stabilize mid-week losses.
• Upcoming Data Impact: US economic data, including PPI and jobless claims, will be key for the GBP/USD exchange rate, with little UK data to guide the Pound’s direction.

EUR: Euro Eyes ECB Rate Cuts Amidst Market Expectations

The Euro exchange rates may rise if the European Central Bank (ECB) doesn’t match market expectations for a significant rate-cut path in today’s meeting. While a 25bp cut to the deposit rate (down to 3.50%) is highly expected as the ECB responds to a slowing economy, traders are more focused on ECB President Christine Lagarde’s outlook on future cuts. Lagarde is likely to stay non-committal, emphasizing that incoming data will drive decisions. A gradual rate reduction of 25bp per quarter seems the most probable course, striking a balance within the ECB Governing Council, according to UniCredit Bank.

Markets, however, anticipate a more aggressive approach, with OIS pricing reflecting a 40% chance of another cut in October and nearly 60bp of easing by December. Eurozone bond yields could climb if Lagarde signals that market pricing is overly optimistic, which might strengthen the Euro against the Dollar and Pound. However, there are downside risks: Lagarde’s data-dependent stance, paired with downgraded growth and inflation forecasts, may imply rate cuts as early as October, potentially putting pressure on the Euro. If an unexpected 60bp rate cut occurs, as part of a technical adjustment, it could trigger market volatility.

USD: Dollar Rebounds Following Presidential Debate and Inflation Data

The USD saw a brief dip after the recent presidential debate, which markets interpreted as a narrow win for Harris. However, it quickly rebounded, helped by hotter-than-expected inflation data. A 25bp rate cut from the Fed next week is now 85% priced in, although the outlook for further cuts has muted the Dollar’s rally. The S&P500 is expected to open slightly higher, while the Dollar continues to trade up against a basket of currencies.

The release of the US CPI data showed a 0.3% month-on-month increase, slightly above the forecasted 0.2%. Although stocks initially fell, they later recovered, and the Dollar held its gains. The 0.3% reading has solidified a smaller 25bp cut from the Fed rather than a 50bp move. The annual inflation rate dropped to 2.5%, the lowest since early 2021, giving markets some relief and helping maintain stability in stocks.

GBP: Pound Struggles as UK GDP Falls Short of Expectations

The Pound (GBP) faced pressure at the start of the week, following disappointing UK GDP data, which showed no growth for July, falling short of the expected 0.2% rise. This has weakened sentiment towards the Pound, although limited expectations for Bank of England (BoE) rate cuts have kept losses in check.

The release of more US economic data on Thursday, including PPI and jobless claims figures, is likely to drive the Pound’s movement against the Dollar. With little UK data on the horizon, the Pound’s trajectory remains uncertain, with upcoming US figures likely to play a key role in determining short-term GBP trends.