Written by Convera’s Market Insights team
Investors cheer Chinese stimulus measures
George Vessey – Lead FX Strategist
In a rare briefing early this morning, the People’s Bank of China Governor, Pan Gongsheng, said the (PBOC) will cut the reserve requirement ratio by 50 basis points before the year ends and announced that the seven-day repo rate will be reduced by 20 basis points to 1.5%. Asian stocks rallied with the CSI 300 up more than 3.5% – on course for its best day since March 2022. Asian currencies are also stronger across the board.
The outlook for high beta currencies and emerging market stocks appears even brighter following China’s stimulus measures aiming to reenergize the world’s second largest economy. These developments come within a week of the US Federal Reserve having delivered an outsized half percentage point rate cut, giving other central banks room to ease policy. The market mood is upbeat, but the US dollar index did edge up at the start of the week, buoyed by robust US composite PMI figures for September. Although US manufacturing PMI fell from 47.9 to 47, marking the third consecutive month of contraction in the US factory activity and at the sharpest pace in over one year, growth in the services sector remained strong. As a result, the yield on the US 10-year Treasury note extended gains to approach 3.78%, the highest level of the month.
The US dollar index remains supported by its 200-week moving average above the 100 level for now, holding within its 2-year trading range. With markets currently pricing in almost three rate cuts by the Fed before year-end, we doubt this week’s US data will shift that pricing dramatically, keeping the dollar rangebound. However, positive external developments, such as these in China, could weigh heavy on the safe haven dollar.
Pound reclaims €1.20 versus euro
George Vessey – Lead FX Strategist
The British pound has jumped above the key €1.20 handle versus the euro after flash PMIs showed a growing divergence between the UK and its European peers’ economic recoveries. Political jitters are hurting the euro too, whilst China’s boost to the global risk rally has also helped the pro-cyclical, risk sensitive, pound.
The price indicators in in the UK PMI surveys sent mixed signals, with firmer numbers for manufacturing and softer numbers for services prices charged. On the labour market front, the release painted a weaker employment picture, with the composite employment index falling by 1.5pt to 50.6. Overall, the UK’s September PMI surveys point to some softening in the recovery momentum at the end of Q3, but the headline indices remain at resilient levels compared to the rest of Europe. The other supporting factor in addition but also related to the growth differential is the rates differential. The Bank of England’s (BoE) cautious approach to cutting interest rates versus its developed peers is providing the pound with an ongoing yield advantage, making it an attractive currency to investors. As a result, GBP/EUR is trading at its highest level since April 2022, up almost 4% since early August.
The pound has also notched fresh 31-month highs against the US dollar, trading in the middle of $1.33-$1.34. Technically, there’s not much resistance until $1.35 and amidst an unappealing euro at present, the pound looks well placed to absorb any further dollar weakness.
Eurozone PMIs draw attention to growth risks
Ruta Prieskienyte – Lead FX Strategist
The euro briefly dropped below $1.11 on Monday as concerns grew that the European Central Bank (ECB) may need to accelerate monetary easing to counter the weakening Eurozone economy. The flash Eurozone composite PMI dropped for the fourth straight month, reaching 48.9 in September—its lowest since January—down from 51 in August. This marked the first contraction in private sector activity in seven months. Manufacturing output, particularly in Germany and France, declined for the 18th consecutive month (44.5 vs. 45.8), while growth in the services sector, which had propped up the economy, also slowed sharply, especially in France. Input cost inflation hit its lowest since November 2020, and output prices saw the smallest increase since February 2021.
Following the poor PMI data, markets increased their expectations for an ECB rate cut in October, with the OIS curve pricing in a 10bps cut, up from 6bps last week. There is now around 50bps of cuts priced in by year-end, meaning markets could expect a larger cut in December if no action is taken in the upcoming. However, several hawkish ECB members, such as Kazaks, have pushed back against immediate cuts, warning that persistent inflation—particularly in the services sector—remains a key concern. Kazaks also noted the risk of damaging the economy by keeping rates too high for too long, aligning with comments made by Centeno, a known dove, who highlighted risks to the growth outlook last week.
The euro dropped as much as 0.7% against the dollar and declined across G10 currencies, with the largest losses against high-beta currencies like AUD, NZD, and CAD. The German bond yield curve disinverted for the first time since November 2022, signaling expectations of faster ECB easing. European stocks continued to gain, buoyed by the Fed’s recent rate cut, though the French CAC 40 underperformed due to uncertainty surrounding France’s fiscal situation. Overall, while the ECB remains hesitant to act immediately, the weakening data is increasing market pressure for more aggressive easing measures later this year.
Pound flexing muscles above $1.33 and €1.20 vs. USD & EUR
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 23-27
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
