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Powered by resilient U.S. economic growth and volatile $100 oil, a surging dollar is reasserting its dominance over European currencies as markets price in prolonged high interest rates.
The dollar is back in charge. Strong US data pushed it close to a two-month high yesterday, leaving the pound near a three-month low and the euro struggling to keep up.
The reason is fairly simple: the US economy is refusing to cool. September’s purchasing managers’ index (PMI) showed business activity growing at its fastest pace since July 2021, while new orders strengthened and company costs rose sharply. That combination has given investors more reason to think last week’s Federal Reserve rate rise may not be the last.
Oil added to the pressure. Prices briefly fell below $100 a barrel as hopes grew that diplomacy could help reopen the Strait of Hormuz, only to climb back above that level as optimism faded. With higher energy prices threatening to keep inflation elevated, the prospect of further interest rate rises is proving difficult for markets to ignore.
Across the Atlantic, yesterday’s surveys told two different stories. UK growth slowed as businesses grappled with higher costs, while the eurozone enjoyed its strongest expansion since April 2023. That gave the euro an edge over the pound, although neither could make much headway against the dollar. The UK survey also pointed to intensifying inflation pressures alongside weaker growth.
There is plenty still to come. German business confidence, US jobless claims and central-bank speeches will all compete for attention, while Xi Jinping’s state visit to Washington puts US-China relations firmly back on the agenda.
Pound caught between growth and inflation
The pound lost ground to both the dollar and euro yesterday after another awkward set of numbers for the UK economy. Business activity continued to grow in September, but at a slower pace, while costs rose more quickly. Government borrowing is also running £8.1 billion above official forecasts ahead of next month’s Budget, leaving plenty for markets to digest as Bank of England policymakers speak today.GBP/USD: the past year
Euro gets a lift from growth
The euro beat the pound yesterday but could not keep pace with the dollar. Eurozone business activity grew at its fastest rate since April 2023, helped by an improvement in Germany and a return to growth in France. German business confidence is next on the agenda, alongside the European Central Bank’s latest Economic Bulletin.GBP/EUR: the past year
US strength keeps dollar flying
The dollar remains the currency to beat after strong business activity and rising costs strengthened expectations of another Federal Reserve rate rise. US jobless claims and housing figures will put that confidence to another test today, while Xi Jinping’s visit to Washington adds trade and geopolitics to an already busy mix.USD/GBP: the past year
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