US
We expect the FOMC to deliver a dovish cut because the US labor market is worsening. That can drag USD lower and support risk assets.
Stephen Miran was confirmed as Fed Governor by the Senate just in time for this week's FOMC meeting. Miran is the most likely FOMC member to vote for a 50bps cut tomorrow. Meanwhile, Fed Governor Lisa Cook is also expected to attend the upcoming FOMC meeting. An appeals court allowed Cook to continue working during the ongoing legal proceedings. President Donald Trump could still ask the Supreme Court to step in.
US August retail sales (1:30:pm London, 8:30am New York) and industrial production (2:15pm London, 9:15am New York) take the spotlight today. Consensus sees retail sales at 0.2% m/m vs. 0.5% in July. The retail sales control group used for GDP calculations, is projected at 0.4% m/m vs. 0.5% in July. Retail sales activity has held up well the past three month, growing roughly at trend pace. However, the sharp slowdown in labor demand points to looming pressure on household incomes and future consumption.
Industrial production is seen at -0.1% vs. -0.1 in July, though signs of stabilization are emerging. Rising ISM manufacturing New Orders-to-Inventories ratio suggest firms may need to ramp-up production as demand is outpacing supply.
UK
GBP/USD edged higher on broad USD weakness. GBP is underperforming against EUR. The UK July labor market data matched consensus. The unemployment rate was unchanged for a third straight month at a four-year of 4.7% in July (BOE Q3 projection: 4.8%). Worrisomely, the vacancies-to-unemployment ratio (0.43) points to a soft labor market, with the ratio still under the BOE’s threshold equilibrium (0.53).
Meanwhile, UK wage growth remains a key source of underlying inflation pressure given that labor productivity is estimated at 0% in 2025. The policy-relevant private sector regular pay printed at 4.7% y/y in July (BOE Q3 projection: 4.8%) vs. 4.8% in June. Bottom line: the UK economy is skirting with stagflation which can further undermine GBP vs. EUR.
EUROZONE
EUR/USD is up and eyeing a test of its July high at 1.1829. The ECB remains in a good place to keep rates on hold. Eurozone labor costs rose to 3.6% y/y in Q2 vs. 3.4% in Q1. However, the ECB negotiated wage tracker points to labor costs growth slowing further in line with the ECB’s 2% inflation target.
In parallel, the German ZEW investor economic sentiment index unexpectedly improved to 37.3 in September (consensus: 25.0) vs. 34.7 in August, consistent with resilient economic activity. Bottom line: ECB/Fed policy stance continues to underpin the uptrend in EUR/USD.
CANADA
Canada’s August CPI print (1:30pm London, 8:30am New York) is unlikely to derail the Bank of Canada’s (BOC) easing path. The minutes from the BOC July 30 meeting highlighted that some members argued that “further monetary policy support would likely be needed…particularly if the labour market softened further [and] If incoming data showed that the upside risks to underlying inflation were not materializing.”
The BOC has room to resume easing after being on hold since April. Canada’s labor market backdrop is deteriorating rapidly as the economy lost -65.5k jobs in August and -40.8k in July. Underlying inflation remains high but may be topping-out. In August, headline CPI is expected to rise to 2.0% y/y vs. 1.7% in July due to base effect while core CPI (average of trim and median CPI) is seen unchanged at 3.05% y/y vs. 3.05% in July.
The swaps market is pricing nearly 90% odds of a BOC 25bps cut to 2.50% tomorrow and over 80% probability of another 25bps reduction by year-end to a terminal level of 2.25%. The BOC’s more dovish policy stance relative to the RBA and Norges Bank argues for further CAD underperformance against AUD and NOK.
