Market Insight 04-10-2024

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  • Market Insight 04-10-2024

GBP/EUR

Summary: The pound gained against the euro in recent sessions, with the pair trading around 1.1930. The euro has weakened significantly due to lower-than-expected inflation data in the Eurozone, with the Harmonised Index of Consumer Prices falling to 1.8% year-on-year, well below the European Central Bank’s (ECB) 2% target. This has increased market expectations of a 25 basis point ECB rate cut in October, which would be the third reduction this year. In contrast, the Bank of England (BoE) has signalled caution on cutting rates too quickly, though it remains likely to lower rates by 25 basis points in November.

Outlook: With a 95% probability of an ECB rate cut, we could see further euro weakness, which may push GBP/EUR towards higher levels. However, dovish signals from the BoE may limit the pound’s gains. The key focus will be on how both central banks manage inflation expectations in the coming months. Short-term, the euro will remain under pressure as long as Eurozone inflation remains subdued.

EUR/USD

Summary: EUR/USD remains on the back foot, trading around 1.1030, as the euro struggles against a resilient US dollar. Rising odds of an ECB rate cut, along with weaker inflation data from the Eurozone, have put the euro under significant pressure. Meanwhile, the US dollar has gained support from strong economic data, including better-than-expected ISM Services PMI and ADP Employment Change reports. The key event ahead is the release of US Nonfarm Payrolls (NFP) data, which is expected to show modest job gains.

Outlook: The direction of EUR/USD hinges on the upcoming NFP data and the ECB’s rate decision. A strong NFP report may bolster the US dollar, pushing EUR/USD lower towards 1.0900. Conversely, weaker US jobs data could shift market expectations towards a more aggressive Fed rate cut, allowing the euro to recover toward 1.1200. Overall, the euro remains vulnerable amid rising geopolitical risks and an anticipated ECB rate cut.

GBP/USD

Summary: GBP/USD saw significant losses recently, falling sharply below 1.3150 due to broad-based US dollar strength and dovish remarks from BoE Governor Andrew Bailey. The BoE has indicated caution regarding inflation but remains expected to cut rates in November. Meanwhile, the US dollar has benefitted from robust economic indicators, such as the ISM Services PMI and ADP Employment Change, both beating market expectations.

Outlook: GBP/USD could face further downside if US NFP data surprises to the upside, potentially pushing the pair towards 1.3000. However, a dovish Fed stance could provide some relief for the pound, allowing a recovery back above 1.3150. The medium-term outlook depends on central bank policy decisions in both the US and UK, with market participants closely watching economic data to assess the likelihood of future rate cuts.

AUD/USD

Summary: The Australian dollar has maintained a firm stance, supported by hawkish expectations for the Reserve Bank of Australia (RBA) and stimulus measures in China. Recent Australian retail sales data exceeded forecasts, reducing the chances of an early rate cut by the RBA. However, rising geopolitical tensions, particularly surrounding the conflict in the Middle East, have limited risk appetite, putting some pressure on the risk-sensitive AUD.

Outlook: The Australian dollar may face headwinds if US NFP data strengthens the case for further US dollar gains. However, if geopolitical risks subside and China’s economic recovery continues, the AUD could find support, especially if the RBA maintains its hawkish outlook. Short-term, AUD/USD could test lower levels around 0.6350, but a recovery to 0.6450 is possible if risk sentiment improves.

Final Summary:

The currency markets remain highly sensitive to central bank policies and geopolitical risks. The euro is under significant pressure due to weak inflation data and expectations of an ECB rate cut, while the US dollar continues to benefit from strong economic data. The pound faces mixed prospects, with the BoE signalling caution on rate cuts. Meanwhile, the Australian dollar holds firm, although risk sentiment remains fragile. The upcoming US Nonfarm Payrolls data will likely drive the next major market move, particularly for USD pairs.