USD, EUR, and GBP Show Diverging Trends.

• USD Rises, Then Retreats: The dollar index rose on Monday due to Eurozone weakness but pulled back after U.S. manufacturing PMI contracted more than expected, along with dovish Fed comments supporting rate cuts.
• Dovish Fed Signals: Minneapolis Fed President Kashkari and Chicago Fed President Goolsbee indicated support for further rate cuts, shifting focus from inflation to labor market concerns.
• Euro Drops on Economic Concerns: The euro fell as Eurozone manufacturing and composite PMIs showed sharper contractions than anticipated, raising the likelihood of ECB rate cuts.
• Germany’s Economic Struggles: Germany’s September PMI hit a 7-month low, signaling a recession risk, with its key auto industry in decline due to weak demand from China and competition from electric vehicles.
• Pound Strengthens: The British pound surged to a 2-year high against the euro and dollar, supported by stronger UK economic data and the divergence in monetary policy between the UK, ECB, and U.S.

USD: Dollar Index (DXY) Sees Modest Gain
The dollar index (DXY00) climbed by 0.14% on Monday. The greenback was supported early on as economic concerns in the Eurozone weighed on the euro after worse-than-expected contractions in September’s manufacturing and composite PMIs. However, the dollar later retreated from its peak after the U.S. September S&P manufacturing PMI showed its steepest contraction in 15 months. Additionally, dovish comments from the Fed dampened dollar strength as Minneapolis Fed President Kashkari and Chicago Fed President Goolsbee advocated for further rate cuts. Strong performance in U.S. stocks also reduced the dollar’s appeal. On the data front, the August Chicago Fed National Activity Index jumped to 0.12, surpassing expectations of -0.20. Yet, the U.S. September S&P manufacturing PMI dropped to 47.0, well below the forecast of 48.6. Kashkari emphasized that the risks have shifted from inflation toward labor market weakness, supporting a 50 basis point cut. Meanwhile, Goolsbee argued for significant rate reductions to protect the labor market. Markets are pricing in a 100% chance of a 25 bp cut at the upcoming November FOMC meeting and a 54% chance of a 50 bp cut.

EUR: Euro Under Pressure Amid Economic Weakness
The euro (EUR/USD) slid by 0.42% on Monday, weighed down by signs of economic fragility in the Eurozone. September’s PMIs for both manufacturing and the composite sectors contracted more sharply than anticipated, prompting fears of more dovish ECB policies. The swaps market raised the probability of a 25 bp ECB rate cut at the October 17 meeting to 41%, up from 26% on Friday. The Eurozone manufacturing PMI dropped to 44.8, and the composite PMI fell to 48.9, both showing steep contractions. Deutsche Bank analysts noted that while the UK economy continues to outperform, Germany’s manufacturing sector, once the continent’s powerhouse, is suffering heavily. The German PMI sank to 47.2 in September, raising concerns of a technical recession as job cuts hit their highest level since 2020. A decline in Germany’s crucial automotive sector, exacerbated by weak Chinese demand and competition from cheaper electric vehicles, is leading to potential factory closures and layoffs at Volkswagen.

GBP: Sterling Surges Against Euro and Dollar
The British pound reached €1.20 against the euro for the first time in over two years, boosted by expectations of a German recession. Sterling also hit a two-and-a-half-year high against the dollar at $1.3359. Stronger-than-expected economic data from the UK compared to its Eurozone and U.S. counterparts contributed to this rise. Goldman Sachs projects the pound will climb further, predicting a value of $1.40 within 12 months. The divergence in monetary policy among the UK, the ECB, and the U.S. Federal Reserve continues to support the pound’s recent strength.