A Thorough Economic Update: USD in Focus.

• USD Strengthens: The US Dollar gained momentum, driven by positive economic data, including rising job openings, despite weaker-than-expected manufacturing activity. Geopolitical tensions in the Middle East also contributed to a risk-averse market mood.
• GBP/EUR Stability: The Pound to Euro exchange rate remained steady below 1.2000, with the UK’s stronger-than-expected housing data and easing borrowing costs supporting GBP sentiment, though concerns linger over the upcoming UK budget.
• Middle East Tensions: Iran’s missile attacks on Israel escalated geopolitical tensions, leading to surges in oil prices and a shift toward safe-haven assets like gold. Market uncertainty grew as investors awaited Israel’s response.
• Brexit Relations Reset: UK Prime Minister Keir Starmer is working to reset post-Brexit relations with the EU, meeting with European Commission President Ursula von der Leyen. The first bilateral summit between the UK and EU is planned for next year.
• Swiss Franc Rally: The Swiss National Bank is prepared to intervene in currency markets, signaling potential future rate cuts. The Swiss franc has strengthened significantly, approaching its highest level in nearly a decade.

USD: The US Dollar (USD) continued to strengthen against other currencies following Monday’s bullish performance, with the USD Index reaching its highest in nearly two weeks, surpassing 101.00 on Tuesday. Investors are closely watching the European Commission’s release of August unemployment data and the US ADP Employment Change data for September. Fed officials, including Governor Michelle Bowman and Richmond Fed President Thomas Barkin, are also scheduled to speak. On Tuesday, the US Bureau of Labor Statistics reported that JOLTS Job Openings increased to 8.04 million in August, up from 7.71 million in July. However, the ISM Manufacturing PMI remained stagnant at 47.2 in September, missing the forecast of 47.5, indicating ongoing contraction in the manufacturing sector. Wall Street reacted negatively to these reports, with key indexes dropping as investors shifted to a risk-averse stance. Heightened geopolitical tensions, particularly following Iran’s firing of ballistic missiles on Israel, have also added to market uncertainty. Israel’s Prime Minister Benjamin Netanyahu has vowed retaliation, deepening concerns over a potential conflict in the Middle East. Reflecting the cautious sentiment, US stock index futures fell between 0.3% and 0.4%.

GBP: The Pound to Euro (GBP/EUR) exchange rate stabilized just below the 1.2000 level, supported by firm GBP sentiment and struggles in the Eurozone. Analysts at ING expect the pair could rise to 1.2050 in the near term but are cautious about the medium-term outlook. Concerns linger that the pound may face a correction as UK economic data points to increased pressure for easing. UK house prices rose by 0.7% in September, beating expectations, with annual growth climbing to 3.2%. Nationwide’s Chief Economist Robert Gardner noted that borrowing costs have eased, expecting the Bank of England to lower interest rates in the coming months. However, uncertainty looms over the UK budget, with potential tax increases sparking investor caution.

Iran Tensions: Oil prices surged, and gold held near record highs after Iran launched a barrage of missiles at Israel, escalating tensions in the Middle East. Israel’s defense forces intercepted many of the missiles, and Prime Minister Netanyahu vowed retaliation. As markets await Israel’s response, risk-off sentiment has weighed on global equities, although Hong Kong shares extended a stimulus-driven rally, buoyed by optimism over China’s economy. Meanwhile, equities in Japan and South Korea struggled amid cautious market sentiment.

Brexit: UK Prime Minister Keir Starmer’s trip to Brussels marks a significant step toward forging a new post-Brexit relationship with the EU. Starmer is set to meet European Commission President Ursula von der Leyen to reset relations, following years of tense negotiations. Both sides are eager for a positive reset, but differences in priorities suggest tough talks ahead. Britain and the EU are planning their first bilateral summit next year, signaling a major shift in relations.

SNB: The Swiss National Bank (SNB) stands ready to intervene in currency markets and may lower interest rates further if necessary, according to new President Martin Schlegel. While the bank has cut rates three times consecutively, Schlegel hinted that more easing is likely, though not guaranteed. Meanwhile, the Swiss franc has been strengthening, with some analysts predicting it could reach its highest level in nearly a decade. Schlegel emphasized that Switzerland’s real exchange rate is more crucial for competitiveness than its nominal rate.

French Budget: French Prime Minister Michel Barnier has postponed the country’s target to bring its budget deficit within EU limits by two years, now aiming for 2029 instead of 2027. Barnier’s plan includes spending cuts and tax hikes for the wealthy and large corporations. Restoring public finances remains a key challenge for Barnier, whose centrist coalition is vulnerable to opposition efforts to topple the government. Investors have been increasingly wary, with French assets facing significant sell-offs in recent months.