USD, GBP and EUR on the Move.

• USD Strengthens: The US Dollar Index (DXY) continues to rise, boosted by Federal Reserve Chairman Jerome Powell’s remarks that future rate cuts will be gradual.
• Interest Rate Expectations: Markets predict a 61.8% chance of a 25 basis point rate cut by the Federal Reserve in November, with odds of a larger 50 basis point cut decreasing.
• UK Economic Concerns: Reports from the CBI and IoD show declining business confidence and growth expectations, which could threaten Pound Sterling’s 2024 outlook.
• GBP Performance: Despite economic concerns, the Pound hit strong levels in September, peaking against both the Euro and US Dollar, due to economic resilience and slow rate-cut expectations.
• German Inflation Eases: Germany’s inflation fell to 1.6%, the lowest since February 2021, increasing pressure on the ECB to cut rates, though the bank remains cautious due to wage growth and services inflation.

USD: The US Dollar Index (DXY), which tracks the value of the US Dollar (USD) against six major currencies, extended its rally for a second consecutive day. On Tuesday during Asian trading, the DXY hovered around 100.80, bolstered by remarks from Federal Reserve Chairman Jerome Powell. Powell clarified that the central bank is in no rush to cut rates, signaling that future rate reductions will happen “over time.” He emphasized that the recent 50 basis point rate cut should not be viewed as a sign of aggressive future moves, suggesting that any upcoming cuts will likely be smaller. According to the CME FedWatch Tool, markets are assigning a 61.8% chance of a 25 basis point rate cut in November, with the odds of a 50-basis-point cut dropping to 38.2%, down from 53.3% the previous day. Last week, the US Core Personal Consumption Expenditures (PCE) Price Index rose by just 0.1% MoM in August, falling short of the anticipated 0.2% increase. This development aligns with the Federal Reserve’s stance that inflation is cooling, which strengthens the case for a more aggressive rate-cutting cycle. Traders are eyeing the upcoming US manufacturing data, including the ISM Manufacturing PMI, which is expected to improve slightly to 47.5 in September from 47.2 in August, offering insight into the state of the US manufacturing sector.

GBP: Keir Starmer’s “cloud of uncertainty” looms large as the UK economy shows signs of slowing. Reports from the Confederation of British Industry (CBI) and the Institute of Directors (IoD) highlight declining business confidence, which could threaten Pound Sterling’s potential outperformance in 2024. Private sector growth expectations softened in September, with the CBI’s Growth Indicator survey showing firms expect no change in activity over the next three months, breaking a seven-month streak of positive growth outlooks. Meanwhile, the IoD’s Economic Confidence Index fell sharply to -38 in September, down from -12 in August, marking the lowest point since December 2022 (-58). A note from MUFG Bank Ltd suggests the weak data may prompt the Bank of England to pursue faster and deeper rate cuts, which could diminish the GBP’s recent strength. Despite this, the Pound saw significant gains in September, reaching a high of 1.2012 against the Euro and peaking at 1.3430 against the US Dollar, supported by UK economic resilience and expectations of gradual interest rate reductions.

EUR: In the Eurozone, Germany’s inflation rate eased to 1.6% year-over-year in September, down from 1.9% in August, and missed market expectations. This marked the lowest level since February 2021, largely driven by a significant drop in energy costs. On a monthly basis, inflation was flat, up from -0.1% in August, falling short of the projected 0.1%. Core inflation also dipped slightly to 2.7% from 2.8% in August, its lowest since January 2022. The inflation slowdown in Germany mirrors trends across the Eurozone. The upcoming Eurozone inflation data, set to be released on Tuesday, is projected at 1.9%, down from 2.2% in August, which marked a three-year low. A reading below the 2% target would pressure the European Central Bank (ECB) to further lower rates to stimulate the sluggish economy. However, the ECB remains cautious due to persistent services inflation and wage growth, likely holding off on rate cuts until at least December.