Market Focus on PMI Releases as Central Bank Policy Debates Intensify

USD
In the United States, discussions around monetary policy have intensified following Stephen Miran’s criticism of the Federal Reserve’s recent decisions. Miran contends that policy has been overly restrictive and has suggested a possible two-percentage-point cut in the federal funds rate. His argument draws on a revised interpretation of the Taylor rule and considers structural factors such as immigration, shifts in trade patterns, and fiscal expansion, which he believes have lowered the neutral interest rate.

Not all Fed members share this perspective. St. Louis Fed President Alberto Musalem supports cautious rate cuts to protect the labour market, while Atlanta Fed’s Raphael Bostic anticipates only a single cut in 2025, reflecting a more restrained stance. Critics of Miran describe his proposals as speculative, particularly his minimisation of tariffs as inflationary pressures. Nonetheless, Miran’s profile is rising, especially with the position of Fed Chair expected to be reconsidered soon.

GBP
Sterling remains around 1.35 against the US dollar, close to its decade-long average, while drifting towards 1.14 against the euro. Market attention is on the flash PMI readings, with services in particular under the microscope due to their dominance in the UK economy. A stronger-than-expected reading could lift the pound in the short term, while a weaker outcome may exacerbate stagflation concerns.

The UK faces several headwinds, including subdued borrowing, concerns over fiscal management, and surging long-dated gilt yields, which have reached levels last seen in the late 1990s. In response, the Bank of England has slowed quantitative tightening, reducing its annual bond sale target from £100 billion to £70 billion and prioritising shorter maturities. The government has also cut back on issuing longer-term debt.

Despite these challenges, signs of resilience remain. Certain UK economic indicators point to stabilisation, fundamentals appear stronger than sentiment suggests, and market positioning against sterling remains heavy. This leaves room for the Autumn Budget to act as a positive catalyst, though with the announcement now delayed until late November, uncertainty persists.

EUR
The euro rose by approximately 0.5% yesterday, with demand strengthening around 1.1785 against the US dollar. Overall sentiment remains constructive, although market gains are tempered by the Federal Reserve’s cautious approach. Investors are closely watching central bank commentary this week, following recent adjustments by both the Fed and the European Central Bank (ECB).

ECB officials, including Joachim Nagel, have expressed confidence, downplaying concerns that a stronger euro could impact exports. Data also surprised positively, with September consumer confidence improving to -14.9, surpassing expectations of -15.3. Today’s eurozone PMI releases are unlikely to dramatically move the currency, with investors still largely guided by developments in US policy.

Looking Ahead
Market focus will remain on PMI data from the UK and eurozone, offering early insights into economic momentum. In the UK, services activity will be critical for assessing inflationary pressures and guiding Bank of England decisions. In the eurozone, investor sentiment continues to hinge more on shifts in the Fed’s tone than on regional economic data. In the US, Miran’s unconventional stance has stirred debate, and any updates from the Fed will be closely monitored.

Overall, the coming weeks are expected to bring heightened volatility as markets navigate contrasting central bank signals against a backdrop of fragile fiscal conditions.

For all you Global payments & currency conversion solutions go to Monfor