The Race for Rate Cuts Heats Up.

• GBP Strength: The British Pound firmed against the Euro after UK wage data met expectations and unemployment unexpectedly fell, signaling a steady economic environment.
• Wage Growth: UK wages grew by 4.9% (excluding bonuses), maintaining pressure on inflation and reinforcing a cautious approach by the Bank of England on future rate cuts.
• Fed’s Steady Path: The U.S. Federal Reserve is committed to gradual rate cuts as inflation nears the 2% target, while the U.S. dollar remains strong due to global economic uncertainties.
• ECB Decision Anticipation: Market optimism for a 25 basis point rate cut from the European Central Bank is high, but there is a risk of disappointment if the ECB decides to hold off.
• Labor Market Cooling: In the UK, declining job vacancies and slowing wage growth could ease inflation pressures and allow for quicker rate cuts in the future.

GBP: Pound Sterling Gains on Euro Amid Solid Wage Data
The British Pound strengthened against the Euro following the release of on-target wage growth data and a drop in UK unemployment. The GBP/EUR exchange rate reached 1.1977 after the Office for National Statistics (ONS) reported a 4.9% rise in UK wages (excluding bonuses) for the year through August 2024. Including bonuses, wages increased by 3.8%, aligning with expectations and leaving the Bank of England’s upcoming rate decisions largely unaffected. The surprise drop in unemployment to 4% from 4.1% could prompt a more cautious approach to rate cuts. “With wage numbers meeting expectations, focus will shift to Wednesday’s inflation report,” notes Alon Rajic of Moneytransfercomparison.com. The Pound remains 2024’s top-performing major currency, benefiting from the Bank of England’s measured pace in cutting rates. However, a faster rate-cutting cycle could dampen its uptrend, should UK economic data permit it. These wage figures, while not decisive, point to a gradual easing in labor market conditions, with vacancies declining to 841,000 in July–September, down by 34,000 from the previous quarter. A cooling labor market may lead to slower wage growth, easing inflationary pressures and allowing the Bank to accelerate rate cuts. “We still expect the Bank of England to proceed with successive 25 basis point cuts from November, taking the rate to 3.25% by August next year,” says Bruna Skarica, Chief UK Economist at Morgan Stanley.

USD: Fed Maintains a Steady Course as Economy Hits “Sweet Spot”
Federal Reserve representative Christopher Waller described the U.S. economy as being in a “sweet spot,” with a healthy labor market and inflation trending back towards the 2% target. Waller emphasized the need for a steady pace of rate cuts, following the Fed’s initial 50 basis point reduction. Market expectations now show the Federal Reserve cutting rates less aggressively than the European Central Bank (ECB) for the remainder of 2024, a reversal from earlier forecasts. “EUR/USD has fallen below the 1.09 level, as demand for the U.S. dollar remains robust,” said Kristoffer Kjær Lomholt, an analyst at Danke Bank. FOMC member Neal Kashkari supported a modest reduction in rates going forward, as inflation approaches the Fed’s 2% target. Michael Brown, Senior Research Strategist at Pepperstone, commented, “The greenback’s strong performance is driven by a lack of alternatives, with weak economic recoveries in China, eurozone stagnation, and the UK facing austerity in its upcoming budget.”

EUR: ECB Faces High Market Expectations Ahead of Rate Decision
Market sentiment remains upbeat as the European Central Bank (ECB) prepares to announce its rate decision on Thursday. European and Chinese equities are rising, and the VIX is edging lower, despite concerns about European growth. Fitch’s negative outlook on France had little effect on the bond market, as the 10-year Bund-OAT spread tightened. While markets expect a 25 basis point rate cut from the ECB, this optimism could prove risky, as the inflation fight is far from over. There are valid reasons for the ECB to pause rate cuts at this meeting, despite the market pricing in a 95% chance of a cut in the past two weeks. A failure to meet these high expectations could trigger significant market volatility. Although an October cut is expected, a surprise move by ECB President Christine Lagarde to hold off on a cut could lead to a broader risk-off shift in the markets. With current market sentiment positive and volatility near year-to-date lows, a failure by the ECB to meet expectations could result in notable market swings.