GBP

The Bank of England remained in a wait-and-see stance. Inflation printed as expected nearer to 4% than 3% in both the headline and core measures, consistent with a stagflationary context that makes it difficult for the central bank to justify further cuts.There were contradictory messages in the UK labor market report last week. While survey measures suggest robust expansion of employment, tax data on payrolled employees showed another small monthly contraction. No such ambiguity was on display in the government budget numbers for August, which showed that expenditure and the deficit continue to outpace all predictions. All in all, we think that the downside risks to the Pound are finely balanced by support from high interest rates and cheap valuation by most measures.

EUR

After the ECB cut rates to what appears to be the cycle low of 2%, the Eurozone seems to have dropped off somewhat from the newsflow driving currency markets. Economic growth is sluggish and just about sufficient to keep the Eurozone from falling into a recession, supported by still strong employment and services spending. The PMI indices out Tuesday will give us a fresh read into the state of the Eurozone economy.

USD

MArkets had diverging reactions to the widely expected 25bp Federal Reserve cut last week. Stocks chose to interpret it bullishly, as they seem to do with every single piece of nes lately, and rallied to fresh records. Bonds, however, seemed to be disappointed by the fact that only the most recent Trump appointee to the board voted for a 50bo cut, and by the wide dispersion of expectations evident in the “dots plot”, which suggest deep divisions about whether to prioritize above-target inflation or the weakening labor market. This week’s August PCE inflation report out Thursday will be the main focus of attention for the US dollar.