USD
The dollar clawed back some ground on Friday, with the closing 0.2% higher around 101.8 after flash PMIs painted a hot picture of the US economy, seeing manufacturing at 56.0, its highest in over four years, and selling-price inflation at its strongest since August 2022. In response, recouped 5bp to 5.00%, reversing part of Thursday’s 17bp plunge, and the fell 0.5%. Starting the new week, oil has eased 1-2% in Asia, leaving the dollar a touch softer. Meanwhile, Lula’s narrow Brazilian win, which Flávio Bolsonaro refuses to recognise, comes as a major surprise, and should hit the hard. With the Fed in blackout ahead of Wednesday’s expected hold and a thin calendar today, Iran headlines should dominate ahead of a jam-packed roster later in the week.
EUR
slipped lower to test 1.12 on Friday as the flash PMIs confirmed the loss of momentum we had warned about. The eurozone composite dropped to 51.9 from 53.1, well below the 52.7 consensus, with services slowing sharply and French activity contracting at 48.4 alongside the weakest business confidence since 2012 outside the pandemic. The ended the week at 170bp, with France now paying more to borrow than Italy or Greece. Moody’s affirmation of the Aa3 rating with a negative outlook after the close was a relief, lifting EURUSD to 1.122 overnight, but it hardly settles the fiscal question. Saturday’s protests drew roughly 400k by the Interior Ministry’s count, with almost 1,000 arrests and another day of action called for next weekend, while near $115 keeps French fuel prices close to record highs. Today brings the IFO survey results at 09:00 GMT, where consensus looks for little change, though Friday’s PMIs point to downside risk. With the ECB set to hold at 2.50% on Thursday and markets over-confident on a December hike, we continue to favour fading euro rallies, with 1.11 the key level to watch.
GBP
Sterling underperformed on Friday despite another robust data print. The UK flash composite PMI jumped to 53.1 from 52.0, well above the 51.8 consensus, with new orders at their strongest since September 2024 and employment rising for the first time in two years, offsetting Thursday’s 0.4% fall in retail sales. With no UK data today, attention turns to pre-Budget briefing ahead of Chancellor Healey’s first major event, which kicks off around 12:30 GMT on Wednesday. Based on recent reporting, we expect few big announcements, leaving headroom around £15bn with no major tax changes. Crucially, this would involve punting major spending decisions into 2027, posing a credibility challenge for the Chancellor’s plans. If he can assuage market fears, is likely to remain in a 1.33-1.34 range on the day, but risks, as we see them, are skewed firmly to the downside.
CAD
The loonie finished Friday little changed, with trading close to the 1.40 level, helped at the margin by August retail sales figures. Granted, headline sales rose 1.2%, a touch shy of the 1.3% consensus, but with gains across all nine subsectors and a 0.7% advance estimate for September, that is still a more constructive picture than seen across other recent data releases. With no Canadian data today, oil headlines will dominate ahead of Wednesday’s Bank of Canada decision at 13:45 GMT. Swaps still price roughly an 80% chance of a hike to 2.50%, but we think a hold at 2.25% with hawkish guidance is more likely given subdued core inflation and a soft labour market. If we are right, a sharp front-end repricing should push USDCAD back towards 1.42, leaving loonie risks skewed to the downside in the week ahead.
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