Ebury Market Weekly Report: Dollar Rebound Continues as US Recession Fears Fade

Generally strong economic data last week led markets to start pricing out some Fed cuts. Spending remains healthy and consistent, with decent growth, despite the slowing labour market. With little sign of economic acceleration across the Atlantic, the resulting rise in US rates was enough to push the dollar higher against all major currencies. The upcoming ruling on the legality of Trump's firing of Fed Governor Cook, and its implications for Federal Reserve independence, remain a tail risk for the greenback, but for now, the main alternative to the US dollar appears to be not a different currency but gold, which continues to make record highs every week.

Enrique Díaz-Álvarez, Chief Economist at Ebury, said: “This week the focus should have been on the all-important US September labour market report on Friday, but once again Us politics may steal the spotlight. A potential US Federal budget shutdown if the October 1st deadline for a funding bill is breached may result in the delay of the report's release. The flash September inflation report out of the Eurozone (Wednesday) will be the other focus for traders. In the UK, fragile bond market sentiment will keep the spotlight on internal Labor politics and their impact on the deficit and the upcoming budget statement.”

GBP

The PMI indices suggested a loss of momentum in the UK economy, as the manufacturing sector contraction accelerates. Gilt yields continue to hover near multi-decade highs, as markets remain wary of the willingness and ability of the labour government to close the fiscal gap.

Enrique Díaz-Álvarez added: “The main support for Sterling comes from the highest rates in the G10 world, but even here the story is not all positive: this reflects the clear stagflationary state of the UK economy, which limits the ability of the Bank of England to provide monetary stimulus without spooking the bond market.”

EUR

PMI numbers last week were consistent with sluggish growth, with a slight contraction in the manufacturing sector compensated by somewhat livelier services data. As to the former, we are puzzled by the total absence of any sign of impetus from the massive German stimulus package announced almost six months ago. Inflation expectations have edged up, and though they remain relatively contained, this probably means further ECB cuts are off the table. September inflation data on Wednesday should be a non-event, and core is expected to remain unchanged, slightly above the ECB target for the fifth consecutive month.

USD

Second-quarter GDP growth was revised higher, and home sales, durable goods orders and personal income and spending all came out stronger than expected. The US economy seems to be growing at a steady rate, even while the job market creates few jobs, a sign that the employment slowdown has more to do with labour supply (lowered by the immigration crackdown and demographics) than a faltering economy. A spate of labour market reports culminating in the September payrolls number on Friday will add further clarity to the state of the US labor market, but the likely lack of a bipartisan accord to increase the debt limit may interfere with economic releases out of the US, further adding to the sense of political chaos and institutional degradation.