Pound Gains, Euro Struggles, and Dollar Stays Steady Ahead of Fed.

• Pound Gains: The GBP/EUR exchange rate rose to 1.1870, supported by weak German data and stable expectations for Bank of England (BoE) interest rates.
• Inflation Watch: UK inflation data, set for release on Wednesday, could influence the BoE’s next move, with a focus on core inflation, particularly in the services sector.
• Euro Weakness: The Euro fell after Germany’s ZEW sentiment index hit its lowest point since October 2023, reflecting declining economic optimism.
• US Dollar Holds Steady: The US dollar remained stable, buoyed by strong retail sales data, though Fed rate cut expectations kept gains in check.
• Market Caution: Uncertainty around BoE and Federal Reserve decisions is making traders cautious, with both central banks closely watched for potential policy changes.

GBP: The Pound to Euro (GBP/EUR) exchange rate climbed to 1.1870 on Tuesday, reaching near 10-day highs. Weak German economic data weighed down the Euro, while expectations of no change in the Bank of England’s (BoE) interest rates this week provided support for the Pound. Equity markets also performed well, with optimism growing over the potential for a 50 basis-point rate hike. The FTSE 100 index hit a 2-week high, bolstering risk appetite and lending further strength to Sterling.

The market expects the BoE to maintain rates at 5.00%, but Wednesday’s UK inflation data could shake things up. Consensus forecasts see the headline rate steady at 2.2% for August, with the core rate predicted to rise to 3.5% from 3.3%. BoE officials will be watching core data, particularly in the services sector, closely. A stronger-than-expected release would lessen the likelihood of a rate cut this week, while weaker data could spark calls for action.

Andrew Goodwin, chief UK economist at Oxford Economics, expects the BoE to hold off on major decisions until November, when they will update forecasts to account for the impact of the budget. Danske Bank foresees a possible short-term dip for the Pound on Thursday but remains bullish on long-term GBP/EUR gains, driven by UK economic resilience and the BoE’s slower approach to easing compared to other central banks.

EUR: The Euro stumbled on Tuesday, weakened by a sharp drop in Germany’s ZEW economic sentiment index. The index fell to 3.6, its lowest since October 2023, marking the third consecutive decline in sentiment. This further dented confidence in the Eurozone’s largest economy. ZEW President Achim Wambach noted the fading optimism for a swift economic recovery, as expectations for Germany continue to decline. The split between optimists and pessimists now sits evenly, reflecting growing uncertainty.

Meanwhile, the Pound moved sideways without any significant data releases on Tuesday. However, expectations that the BoE may take a more cautious approach to easing than its peers provided some support. The risk-on sentiment in the markets also gave the Pound an edge over safer assets like the Euro.

USD: The US dollar (USD) saw little movement on Tuesday but found some modest support from stronger-than-expected retail sales data for August, which beat forecasts for the fifth straight year. Retail sales grew 0.1%, surpassing predictions of a 0.2% decline, although the pace slowed from July’s upwardly revised 1.1%.

Michael Brown, a market analyst at Pepperstone, highlighted the positive surprise in retail sales but noted that expectations of a looming Federal Reserve rate cut limited the dollar’s upside potential. The market is split on whether the Fed will opt for a modest 25 basis-point cut or a more aggressive 50 basis-point reduction. With the Fed’s decision looming, traders remain cautious about making bold moves on the dollar until clearer policy signals emerge.