Webinar: What's shaping Q4 markets? Register Here
Join BBH’s Elias Haddad and Peter Kinsella, Global Head of FX Strategy at UBP as they discuss the September FOMC meeting, US trade policy, and the impact of increased stablecoin adoption
30 Minutes, Thurs Sep 25th | 6:30 AM PDT | 9:30 AM EST | 14:30 BST | 15:30 CET
 

• A more dovish Fed policy stance can drag USD lower and underpin the rally in risk assets.

• ECB poised to keep rates on hold. French politics on the brink.

• Peru and Chile central banks to stand pat. Turkey to slash rates.
   

Fed Faces Difficult Balancing Act

The steeper pullback in US labor demand in August raised Fed funds rate cut bets, sinking USD and Treasury yields. Nonfarm payrolls rose 22k (consensus: 75k) vs. 79k in July while private sector payrolls, a better indication of the underlying momentum in the labor market, printed at 38k (consensus: 75k) vs. 77k in July.

Moreover, employment was revised down by a combined -21k in June and July. On Tuesday we will get a preliminary estimate of what to expect in the annual BLS “benchmark” revisions to 2025 early next year. Fed Governor Christopher Waller estimates that monthly job creation will be reduced by an average of about 60k a month, meaning that job creation since March was weaker than currently reported.

Meanwhile, progress towards the Fed’s 2% inflation goal is stalling. The US August PPI and CPI data are due Wednesday and Thursday, respectively. Headline CPI is seen at 2.9% y/y vs. 2.7% in July and core is expected at 3.1% y/y vs. 3.1% in July. As for the PPI print, watch out for PPI services less trade, transportation, and warehousing as it feeds into the PCE. In July, this measure ticked up to 3.1% y/y vs. 2.8% in June.

Bottom line: we expect the Fed to prioritize maximum employment over price stability within its dual mandate given that monetary policy is moderately restrictive. A more dovish Fed policy stance can drag USD lower against most major currencies and underpin the rally in risk assets. Of note, the Fed’s blackout period, which runs until the September 17 policy decision, goes into effect at midnight tonight.

ECB on Hold, French Politics on the Brink

EUR/USD can build on this week’s gains. Technically, EUR/USD needs to break above 1.1789 (July 24 high) and 1.1829 (July 1 high) to gain upside momentum. The ECB is widely expected to keep the policy rate unchanged at 2.00% for a third consecutive meeting (Thursday). Eurozone inflation remains close to the 2% target and real GDP growth is tracking the ECB’s 2025 forecast of 0.9%. Real GDP rose 0.6% q/q and 0.1% q/q in Q1 and Q2, respectively. New sets of macroeconomic projections are due at this meeting.

The resilient Eurozone growth outlook suggests the ECB is probably done easing which bodes well for EUR. The swaps market price-in 75% odds of a 25bps cut in the next 12 months. Nonetheless, political uncertainty in France is a headwind for EUR.

The French government is on the verge of collapse. Prime Minister François Bayrou is facing a confidence vote on Monday to secure backing for his fiscal policy that aims to tackle France’s fiscal woes. Bayrou is targeting €44 billion in spending cuts for 2026, freeze pensions/benefits/tax brackets, cap spending, and scarp two public holidays. Opposition parties from across the political spectrum have vowed to support toppling the government.

If Bayrou loses the upcoming vote of confidence, President Emmanuel Macron can either appoint a new prime minister that has the support of a fragmented parliament or call snap parliamentary elections. The political turmoil in France can further widen French OAT-German Bund yield spreads but it’s unlikely to weigh meaningfully on EUR as the situation remains country-specific and not systemic.

Moreover, underlying interest for long-term French bonds is encouraging. The bid-to-cover ratio on this week’s €11 billion auctions of French debt maturing in 10, 15 and 30-years was more than double the amount of bonds on offer.

UK Gilt Trip Eases

GBP fully recovered Tuesday’s slump triggered by the brief sell-off in UK government bonds (gilt). Investors worry the UK government will prioritize tax hikes over spending cuts when the Autumn Budget is released on November 26. The unfavorable UK fiscal position is a downside risk for GBP. First, the Bank of England (BOE) could step in and purchase gilts to rein-in any destabilizing pick-up in long-term bond yields. Second, higher taxes risk deepening the UK’s sluggish growth outlook and strongarm the BOE to ease more aggressively.

Encouragingly, the gilt market has stabilized underpinned in part by robust demand for UK long term government debt. The UK raised this week £14 billion from a 10-year gilt syndication, its biggest on record and more than 10 times the amount offered. On Tuesday the UK plans to sell £1.75 billion of bonds maturing in 20-years and on Wednesday £4 billion worth of 6-year bonds hits the market.

On the data front, UK July GDP is the focus (Friday). Real GDP is projected at 0% m/m vs. 0.4% in June which would track below the BOE’s Q3 growth projection of 0.3% q/q. Unfortunately, the BOE has limited room to dial-up easing to shore-up growth because UK services inflation is stubbornly high at 5.0% y/y. Bottom line: the UK’s soggy growth outlook and elevated underlying inflation spell trouble for GBP, especially versus EUR.

Norway Inflation to Keep Policy on a Tight Rope

NOK will take its cue from Norway’s August CPI print (Wednesday). Headline CPI is expected at 3.3% y/y (Norges Bank forecast: 3.5%) vs. 3.3% in July while underlying CPI is expected at 3.0% y/y (Norges Bank forecast: 3.1%) vs. 3.1% in July. Persistently above target inflation backs the Norges Bank’s prudent easing of monetary policy stance which is NOK positive.

At the last August 14 meeting, the Norges Bank kept the policy rate unchanged at 4.25% and reiterated “the policy rate will be reduced further in the course of 2025.” The bank’s policy rate path forecast presented in June implies one 25bps cut to 4.00% by year-end. The swaps market is more dovish pricing in over 80% probability of a 25bps cut at the next September 18 meeting and 50% odds of another 25bps cut in December.

EM Central Bank Watch

Chile central bank is expected to keep the policy rate unchanged at 4.75% (Tuesday). The bank’s quarterly Monetary Policy Report will be published on Wednesday. At the last meeting July 29, the central bank cut rates 25bps to 4.75% in a unanimous vote. The bank also left the door opened for more easing noting that if its baseline scenario materializes, the policy rate “will be approaching its range of neutral values [estimated to between 3.50-4.50%]” in the coming quarters. The bank can afford to be patient before resuming easing because headline CPI inflation is tracking its 2025 projection of 4.3%. The swaps market price-in about 50bps of total cuts in the next 12 months and the policy rate to bottom near 4.25%.

Peru central bank (BCRP) is expected to leave the policy rate unchanged at 4.50% for a third straight meeting (Thursday). However, the bar is low for BCRP to resume easing because inflation in Peru remains at lower band of the 1 to 3% target range. Bloomberg consensus sees only one 25bps cut in the second half of the year.

Turkey central bank (CBRT) is expected to slash rates 200bps to 43.00% (Thursday). The CBRT kept the policy rate unchanged in June and lowered it 300bps at its last July meeting “in view of the decline in the underlying trend of inflation.” The disinflation process is ongoing and argues for a less restrictive policy stance. Core CPI inflation slowed to 33% in August, the lowest since December 2021. Similarly, headline CPI inflation eased to 32.95% in August, the lowest since November 2021 and is on track to fall within the bank’s forecast range between 25% and 29% by end of 2025. Over the next three months, the swaps market is pricing in 650bps of easing.