The macroeconomic story did not change much last week, and most major currencies ended not too far from where they started. The US and the European economies continue to diverge. The former is experiencing solid growth and moderating inflation, while the risks of stagflation are rising on the other side of the Atlantic. Inflation data out of the Eurozone and the latest US nonfarm payrolls report, both reflecting August developments, are consistent with this narrative. The euro´s relative resiliency in the face of this negative data flow is remarkable, and the dollar, euro and the pound both ended the week almost exactly where they started it. Currency markets may be relatively quiet this week, in preparation for the fireworks expected later in September as the main central banks meet. In the Eurozone, July retail sales will provide a read on the state of the consumer there, albeit a lagged one. Elsewhere, the macroeconomic data on tap is mostly second tier and should not have any dramatic effects on currency trading.


Continued gloom over the previous week’s bad PMI numbers, as well as lower expectations for Federal Reserve interest rate hikes, have reduced market expectations for the terminal Bank of England base rate. Rate traders now expect two more hikes, down from three the week prior, and are currently assigning around a one-in-ten chance that the MPC opts for no change at the next meeting in a little over two weeks’ time. Sterling shrugged off this repricing, however, and is trading roughly where it was three months ago in trade-weighted terms. As elsewhere, there is not much data on tap in the UK this week, so attention will be centred on the MPC testimony at the Treasury select committee on Wednesday. We expect communications to continue to stress that further tightening may be required should inflation prove persistent, and for the language to be consistent with at least a couple more rate increases.


August flash inflation data brought little relief to the European Central Bank. Both the headline and the core indices remain stuck above 5%, and the latter shows little sign as yet of the disinflationary trend that we have seen in the US. Lending data is also stalling, further confirming fears that the Eurozone economy is struggling, following the previous week’s dire business activity PMI numbers. Expectations for ECB rate hikes continue to be unwound, as markets expect the central bank to prioritise supporting the weakening economy over ensuring inflation returns to target. Common currency resilience in the face of these headwinds is remarkable, and is acting so far as a reliable floor against the US dollar. Aside from this week’s retail sales data, revised PMI (Tuesday) and GDP (Thursday) numbers could receive some attention, as will tomorrow’s speech from ECB President Lagarde.


The highlight of the week in the FX market was undoubtedly the August payrolls report. While the headline print exceeded expectations and continued to show decent levels of job creation, the sharp downward revisions to the June and July numbers more than made up for this upside surprise. We also saw additional hints that the US labour market is finally loosening. The jobless rate unexpectedly shot up by 0.3 p.p. to 3.8%, while earnings growth eased relative to the previous month. Earlier in the week, the JOLTs job openings report also told the same story: modest weakening, albeit still at strong levels compared to any period before the post-pandemic recovery. This loosening seems to be exactly what the Federal Reserve wanted to see, and we do not expect another rate hike at the September meeting, in line with market expectations. Indeed, we continue to believe that the hiking cycle is now over.