The dollar index (DXY00) experienced a decline of -0.22% on Monday, reflecting a loss of traction for the US currency. This downturn was fueled by growing concerns about weak labor market indicators expected to be released this week. Key reports, including the August JOLTS job openings, September ADP employment change, and September nonfarm payrolls, are anticipated to lead the Federal Reserve towards further interest rate reductions. Additionally, the risk of a US government shutdown, which is looming with a Wednesday deadline, is also dampening investor sentiment towards the dollar. Nevertheless, the dollar managed to recover slightly from its lowest point after a surprising increase in pending home sales in August, which rose by more than anticipated – marking the most significant growth in five months.
Specifically, pending home sales in the US for August rose by +4.0% month-over-month, a substantial increase compared to the expected rise of just +0.4% month-over-month.
In other economic indicators, the US September Dallas Fed manufacturing activity survey unexpectedly decreased by -6.9, falling to -8.7, contrary to forecasts that predicted a minor recovery to -1.0.
Comments from Fed officials on Monday provided mixed signals for the dollar. New York Fed President John Williams noted a reduction in inflation risks while highlighting escalating employment concerns, suggesting that it may be prudent for the Fed to lower interest rates. In contrast, Cleveland Fed President Beth Hammack emphasized that inflation will not likely return to the Fed’s 2% target until late 2027 or early 2028, advocating for a sustained restrictive monetary policy.
Market participants are currently pricing in an 89% probability of a -25 basis point rate cut in the upcoming FOMC meeting scheduled for October 28-29.
Moreover, the EUR/USD exchange rate (^EURUSD) rose by +0.23% on Monday, primarily driven by the dollar’s weakness. Enhanced economic data also supported the euro; notably, the Eurozone’s September economic confidence index saw an unexpected increase. Additionally, hawkish remarks from ECB Governing Council member Makhlouf further bolstered the euro, indicating that the European Central Bank (ECB) is reaching the conclusion of its rate-cutting cycle.
In particular, the Eurozone’s economic confidence index for September edged up +0.2 to 95.5, surpassing expectations which had anticipated a score of 95.3.
Makhlouf reiterated that the ECB is “near the bottom” of its rate-cutting cycle, stressing the need for vigilance as the full implications of US tariffs have yet to fully impact EU imports.
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