Currency Market Update September

Market update for September

The Pound

It looks like the pound's turbulent summer is set to continue into the autumn as the Bank of England's (BoE) conundrum on the path of interest rates creates ever more uncertainty.

The debate centres around whether there is scope for further interest rate cuts before the end of the year, with differing views even amongst the 9-strong BoE Monetary Policy Committee members.

During the last meeting in August the BoE cut interest rates to 4% which came as no surprise, however the vote was much tighter than expected with 4 members voting to keep rates on hold. There is good reason for these differing view points. On the one hand the governor of the BoE Andrew Bailey recently commented that he is more concerned about the downside risk to the job market than the upside risk to inflation.

This suggests he is in favour of continuing on a gradual path of interest rate cuts before the end of 2025. However, with recent inflation data showing a rise back over 3.8% alongside better than expected growth figures it now looks like the odds favour no further rate cuts this year.  On paper, this should provide the pound with some support but as ever, it is not that simple. The lack of clear direction from the Bank of England along with a lack of confidence in the current governments fiscal plans is keeping the pound under pressure.

The US Dollar

Sticking with this theme the US finds itself in a similar squabble with President Trump being typically vocal in his efforts to see interest rates cut further in the US despite not having any authority to do so. This culminated in his attempts to fire Federal Reserve Governor Lisa Cook, setting up a potential show-down between the President and the US central bank.

President Trump said he had several "good people" in mind to replace Cook and as he nominates candidates for the role, removing Ms Cook would mean she could be replaced by someone more favourable to lower interest rates and to the Trump economic agenda. This raises significant questions around the independence of the Fed threatening their credibility within financial markets.

The news has been negative for the Dollar compounded by disappointing jobs numbers  leading to increased bets of a further interest rate cut in September. The Fed will be keen for this to be seen as their decision and not influenced by Trumps actions. Trump, meanwhile may well suggest an alternative view!

The Euro

The Euro has benefitted from the uncertainty in the UK and US, trading strongly against the pound and US Dollar, respectively, over the last month. The European Central Bank appear united and in no rush to alter their current path, having cut interest rates more quickly than their UK and US counterparts. Although this suggests the Euro will continue its strong run of form, the latest French Government collapse may throw a spanner in the works.

Following President Macron’s ill-fated snap election back in June 2024 - the resulting hung, divided parliament has made it impossible for any prime minister to garner the necessary support to pass bills on the yearly budget. Macron faces the unenviable prospect of appointing a fifth prime minister in less than two year's with a high chance of failure or calling a further snap election, which could result in an even more hostile parliament. Something he has insisted he will not do before his term ends in 2027.

Although only affecting one country within the Euro mechanism, the uncertainty may start to undermine the recent Euro strength, providing investors with a reason to take profit on the long Euro positions that have been building over the Summer.

Key Economic News Coming Up over the next week - Pathfinder Currency Market Update September

Thursday 11th

US - Inflation data

Euro - ECB press conference & rate decision

Friday 12th

UK- GDP figures

Tuesday 16th

UK - Unemployment

Euro - Economic sentiment

US- Retail sales

The Pathfinder Team

desk@pathfinder-fx.com

44 (0)1743 290955