USD Steadies, Pound Awaits Key Data, and German Elections Stir Uncertainty.

• USD Stability: The US Dollar remained steady on Monday due to the Labor Day market closure, with a cautious market mood providing minor support. The USD showed signs of recovery, but future movement hinges on this week’s economic data, especially Friday’s Jobs Report.
• Pound Outlook: The Pound’s movement against the USD will be influenced by the US ISM manufacturing PMI release on Tuesday. Despite recent gains, the Pound softened slightly as investors took profits ahead of the US Jobs Report.
• UK Consumer Spending: August saw a modest increase in UK consumer spending, helping to support the Pound, but it wasn’t enough to offset a slight drop against the USD and Euro.
• German Elections Impact: Recent state elections in Germany resulted in significant gains for right-wing parties, signaling trouble for Chancellor Scholz’s coalition. However, the Euro and DAX showed limited reaction to the results.
• Market Sentiment: Overall market reactions were muted despite political changes in Germany and upcoming key economic data in the US and UK, suggesting cautious optimism.

USD: Waiting on the Edge—Will the Greenback Take Off?

On Monday, the US Dollar (USD) remained mostly flat as US markets were closed for Labor Day, leaving the ‘greenback’ without any significant economic data to drive movement. However, the USD did receive minor support from a cautious market atmosphere, which favored the dollar’s status as a safe-haven currency. Recently, the dollar has shown signs of recovery after holding firm at its December 2023 low last week. Whether this signals the start of a more substantial rally depends on the economic events lined up for this week. While markets were quiet on Monday, the week ahead is packed, starting with PMI data on Tuesday and Thursday, followed by JOLTS Job Openings and Unemployment Claims mid-week. All eyes will be on Friday’s crucial Jobs Report, which previously triggered a notable market reaction in early August. With unemployment climbing to 4.3% and sluggish job growth in the last report, there’s a slight hope for improvement this time. However, if the data disappoints again, the Fed might respond with a significant 50bps rate cut in September, potentially pushing the dollar to test 2023 lows, dropping by around 2%.

GBP: Pound at a Crossroads—Will PMI Shake Things Up?

Looking ahead, the main driver for the Pound-US Dollar exchange rate on Tuesday is expected to be the release of the latest US ISM manufacturing PMI. After July’s disappointing numbers, which marked the sharpest sector contraction since November last year, a weak August reading could stir volatility in USD exchange rates. For the Pound, domestic data releases are likely to steer movement on Tuesday, with the British Retail Consortium’s August retail sales monitor forecasted to show a slight rise. This could offer the Pound some support, provided the data meets expectations. On Tuesday, the Pound softened, slipping against both the dollar and the euro as investors cashed in on sterling’s biggest monthly rally in ten months, ahead of a pivotal US jobs report later this week. Although UK consumer spending got a boost from August’s summery weather, lifting spending on food and drink, it wasn’t enough to bolster the Pound significantly. Sterling, which gained 2.13% in August, saw a 0.2% drop against the dollar in early trading, sitting 1.2% below last week’s two-year high of $1.3269. Meanwhile, the euro gained 0.1% against the Pound, continuing a three-day climb after hitting a one-month low last week. Data from Barclays indicated a 1.0% year-on-year rise in consumer spending on credit and debit cards in August, reversing a two-month decline, while the British Retail Consortium reported a similar 1.0% annual increase in shop spending, the strongest since March. These reports, alongside other surveys, suggest that the UK economy could continue to grow steadily in the second half of the year, albeit at a slower pace compared to the earlier rebound from a shallow recession. Lloyds strategists noted, “We’re finally at a point where it’s possible to infer that solid growth in retail values might reflect underlying volume improvements, not just higher prices.”

EUR: Political Shake-up in Germany—But Markets Shrug It Off

German state elections over the weekend dealt a severe blow to Chancellor Scholz’s coalition, with significant gains for right-wing parties. Despite this, the euro remains unfazed, although the German DAX showed some mild weakness. With US markets closed for Labor Day and no major events in Europe, volatility was expected to stay low. However, the state election results could stir some movement in the euro and German markets. The elections confirmed more gains for right-wing parties, spelling more trouble for the federal government. While the outcome was anticipated, the scale of the shift is concerning for Chancellor Scholz. For the first time since WWII, a right-wing populist party has won an election in Germany, casting doubt on the stability of Scholz’s coalition. The market’s reaction has been muted so far, and it remains unclear if the anti-immigrant Alternative for Germany (AfD), which emerged as the largest party in Thuringia, will gain real power. What’s clear is that Olaf Scholz’s coalition is losing support fast. “The federal government parties took a heavy hit in both states. In Thuringia, the Greens and FDP failed to meet the 5% threshold to secure seats, with all three coalition parties combined receiving less than 15% of the votes,” noted ING. The defeat is largely attributed to unpopular immigration policies and Germany’s economic stagnation, which has plagued the country for years. Unless major changes are made, the fragile coalition could unravel. The DAX dipped 0.2% while the euro edged higher against the US dollar and the Pound, suggesting that markets aren’t overly concerned by the results. Some speculate that a political shake-up might be what Germany needs, given the country’s economic and political stagnation. While a large investment program could be the answer, it would require a massive effort from all three coalition parties. More likely is a cabinet reshuffle, which would have a more limited impact.