This past week, while relatively quiet in terms of data releases, was anything but subdued when it came to market movements. The ongoing fallout from the recent underperformance of the U.S. economy, combined with the market’s reaction to the increasingly likely prospect of a 50-basis-point cut at the next Federal Reserve interest rate decision, has driven the British Pound to new multi-year highs against the U.S. Dollar, with EUR/USD reaching levels not seen since July 2023.
The week’s most significant data point came on Wednesday with the release of the UK Public Sector Net Borrowing figures. Typically, this metric has a limited impact on the markets, but the unexpectedly poor results triggered notable volatility. The market had anticipated a drop to £0.5B, but the actual figures were much higher at £2.2 billion, continuing the recent trend of disappointing fiscal data in the UK. This led to a brief sell-off in the Pound, although the impact was short-lived.
Later that day, the Federal Open Market Committee Meeting Minutes were released, providing analysts with deeper insights into the Fed’s recent interest rate decision and potential future actions. The minutes did little to dispel rumours of a 50bp cut, causing the USD to weaken significantly.
Thursday saw the release of Purchasing Managers’ Index data from the Eurozone, UK, and U.S. The Eurozone results continued the ongoing trend: the Services sector remained strong, staying above the critical 50 mark, while Manufacturing lagged significantly, coming in at 45.6. Particularly concerning were the figures from France and Germany, where Manufacturing PMI registered in the 42s.
The UK fared better, with both Manufacturing and Services PMIs remaining above 50, surpassing forecasts. In the U.S., the data was mixed; Manufacturing PMI dropped to 48, below the forecast of 49.5, signalling a contraction. However, the Services PMI came in at 55.2, well above the forecast of 54, an impressive result that briefly helped the USD recover some of its recent losses.
Today, all eyes are on the speeches by Andrew Bailey and Jerome Powell at the Jackson Hole Symposium. Traders will be paying particular attention to Powell’s remarks, as he is expected to provide guidance on future Fed rate cuts.
Looking ahead to next week, several key data points will be released from the U.S. However, the end of August is especially noteworthy, as September is historically the strongest month for the USD, with an average gain of around 1.4% against its closest competitors. Despite the potential for rate cuts, it might be wise to capitalise on these trends while conditions are favourable.
