Pound Falters Amid Tech Stock Slump, Dollar Eyes Data-Driven Rebound.

• Pound’s Mixed Performance: The Pound Sterling has weakened against the Euro and Dollar but gained against the Australian and New Zealand Dollars amid a major slump in U.S. tech stocks.
• Impact of Market Sentiment: The Pound’s performance is closely tied to market sentiment, struggling against safe-haven currencies like the Dollar, Yen, and Franc, but outperforming riskier currencies like AUD and NZD.
• Dollar’s Outlook: This week’s U.S. economic data, including the August jobs report, will be crucial in determining whether the Dollar’s recent downtrend continues or stabilizes.
• Eurozone Concerns: German state elections and weak manufacturing data across Europe are highlighting economic challenges, with the ECB likely to cut rates at its September 12 meeting.
• Tech Stocks Under Pressure: U.S. tech stocks, particularly Tesla, have been hit hard, with Tesla’s shares falling 12% following mixed Q2 results, contributing to broader market declines.

GBP: The Pound Sterling has retreated against the Euro and Dollar while extending gains against the Australian and New Zealand Dollars. This follows the Nasdaq and S&P 500 experiencing their steepest single-day drops since 2022, driven by a sharp decline in U.S. tech stocks. The Pound to Euro exchange rate slipped to 1.1890 as the AI market hype cooled off, while the Pound to Dollar rate now sits below 1.29 at 1.2884. “Markets took a massive hit yesterday, with weak earnings and poor data dragging down investor sentiment. The result was significant losses, with the ‘Magnificent 7’ dropping 5.88%, marking its worst day since September 2022,” noted Henry Allen, a strategist at Deutsche Bank. The Pound’s performance highlights its pro-cyclical nature, tending to struggle against the Dollar, Yen, and Franc, and to a lesser extent the Euro, when market sentiment sours. However, it tends to outperform higher-risk currencies like NOK, SEK, AUD, and NZD. “The British pound has fallen for three consecutive days against the US dollar, ended a three-day winning streak against the Euro, and has been hammered by the Japanese Yen rally, with GBP/JPY down 5% in just 10 trading sessions. On the other hand, Sterling is stronger against the Australian and New Zealand dollars, signaling that global risk aversion is taking hold,” said George Vessey, Lead FX Strategist at Convera. Tech stocks remain under pressure, particularly Tesla, which saw its stock plummet 12% after mixed Q2 results.

USD: This week’s U.S. economic data will be pivotal in determining whether the Dollar’s two-month downtrend continues or if it stabilizes within the ranges seen over the past 18 months. Key focus areas include rate meetings in Canada and Poland, and China’s sluggish economy, although little is expected today due to the U.S. holiday. After a 5% decline since July, the Dollar bounced back last week, but sustaining this rebound requires more data. The week ahead is crucial, with ISM manufacturing data on Tuesday, JOLTS job openings on Wednesday, and a flurry of reports on Thursday, culminating in Friday’s August jobs report. If forecasts of 165,000 job gains and a drop in unemployment to 4.2% are accurate, markets may solidify expectations of a 25bp rate cut as the Fed’s easing cycle begins on September 18. ING’s economist James Knightley, however, predicts a more modest payroll gain of 125k and a slight rise in unemployment to 4.4%. This scenario could push the Dollar back to recent lows, raising the possibility of a 50bp Fed rate cut. Political developments, especially as the U.S. election season heats up, will also play a role, with opinion polls potentially influencing FX markets. With the U.S. Labor Day holiday keeping trading subdued today, it’s unlikely the DXY index will surpass the 101.85/102.00 level.

EUR: The day kicks off with significant attention on German state elections. As Carsten Brzeski points out, this marks the first state election victory for an extreme right-wing party since World War II. The real impact, however, will be on the poor performance of the ruling federal coalition, and whether they plan any new spending measures ahead of next year’s federal elections. None are anticipated, leaving the German economy mired in stagnation as the manufacturing sector continues to struggle. This is expected to be confirmed by another round of weak manufacturing PMIs across Europe today, following a disappointing Dutch PMI this morning. With August Eurozone inflation coming in lower than expected, the ECB has the green light for a 25bp rate cut at its September 12 meeting. However, EUR interest rate swap differentials remain tight, keeping EUR/USD trading around 1.10/1.11. Today’s focus will be on whether intra-day support at 1.1040 holds, or if the pair continues to trade within the 1.05-1.11 range for the foreseeable future.