USD Gains, GBP Drops, and EUR Faces Rate Cut Pressure.

• USD Rises: The U.S. Dollar Index hit a three-week high, driven by stronger-than-expected private payroll data and heightened geopolitical tensions in the Middle East.
• Job Growth: The ADP report showed 143,000 new jobs in September, beating forecasts, boosting confidence ahead of the crucial nonfarm payrolls report.
• Safe-Haven Demand: Iran’s missile strike on Israel raised concerns about broader conflict, increasing demand for the U.S. dollar as a safe-haven currency.
• GBP Falls: The British pound dropped nearly 1% after Bank of England Governor Andrew Bailey suggested interest rate cuts could become “more aggressive.”
• EUR Rate Cut Expectations: Weak economic data and dovish ECB commentary have ramped up expectations for an October rate cut, with markets pricing in multiple cuts.

USD:
The U.S. Dollar Index (DXY) surged to a three-week high on Wednesday, hitting 101.69, fueled by stronger-than-expected private payroll numbers that bolstered confidence in the U.S. economy. The ADP National Employment Report showed a significant rise of 143,000 jobs in September, surpassing the forecast of 120,000. This labor market strength comes just ahead of the pivotal nonfarm payrolls (NFP) report on Friday, which could further influence market expectations regarding Federal Reserve policy. The dollar’s gains were also supported by heightened geopolitical tensions in the Middle East. Iran’s missile strike on Israel Tuesday raised concerns about potential broader conflict, particularly affecting the oil-producing region. Though Iran indicated the attack had ceased, both Israel and the U.S. have promised retaliation if provoked again. These factors have driven up safe-haven demand for the dollar as traders seek stability.

GBP:
The British pound dropped nearly 1% against both the U.S. dollar and the euro after comments from Bank of England Governor Andrew Bailey. He hinted at the possibility of “more aggressive” interest rate cuts, signaling a shift from his previous stance of gradual rate reductions. Bailey’s remarks came after inflation returned to the 2% target, though it has since ticked up slightly to 2.2%. The Bank of England recently cut rates from 5.25% to 5%, marking its first reduction since March 2020. Experts are now predicting one more rate cut by the end of the year, potentially bringing rates down to 4.75%.

EUR:
The Euro has lost momentum over the past two weeks, with weaker data increasing the likelihood of a European Central Bank (ECB) rate cut in October. ECB policymakers, along with German Economy Minister Robert Habeck, have expressed concern over the slow pace of rate cuts. Germany’s economic struggles, combined with softer EU inflation data, have fueled expectations of upcoming rate reductions. UBS even suggested the ECB might have to lower rates to the 1-1.5% range if growth does not improve soon. Markets are now anticipating as many as six consecutive rate cuts from the ECB, with a 25 bps cut in October currently priced at 93%, a significant rise from just a month ago.