Markets have already fully priced in a 25bps rate cut by the ECB at the October meeting, driven by weak economic performance and further cooling inflation. Meanwhile, a strong September US jobs report underscores the resilience of the US economy, and the USD may remain supported leading up to the US election.

EUR: Further cut this month

There are growing risks that the ECB would follow in the footsteps of the Fed and accelerate its easing efforts from here. The view is supported by the weakening growth outlook and steady disinflation in the Eurozone in recent months that have led several Governing Council members to share their expectations that policy rates could be lowered already in October. This in turn could continue to reduce the EUR rate appeal across the board. Growth worries could undermine the appeal of Eurozone stocks.

In addition, the Eurozone sovereign credit risks have reared their ugly head in the wake of the July snap general election in France. In particular, the minority government of Michel Barnier remains vulnerable and the debilitating political gridlock could return even as officials try to deliver the 2025 fiscal budget. While so far there seems to be only limited evidence of contagion from the French political woes to the Eurozone periphery, markets believe that the persistence of these risks on the top of growth fears would ultimately slow down the foreign portfolio inflows into the Eurozone capital markets to the detriment of the EUR. In the near term, the EUR could remain vulnerable to any potential data disappointments as well as evidence that there is a growing number of Governing Council members that support a policy rate cut in October.

USD: Strong Job Reports

Fed Chair Powell's latest comments indicate that the Fed is not in a hurry to cut rates. The recent 50bps cut reflects confidence in maintaining labor market strength while adjusting policy. He stressed that any future rate cuts would be gradual, data-dependent, and could include two more 25bps cuts by year-end. Following his remarks, markets have dialed back expectations for a 50bps cut in November. The September jobs report, which beat expectations came in at 254K jobs compared to August's 159K further solidified this view. Unemployment also fell to 4.1%, the lowest since March, reinforcing the idea that a 50bps cut in November is unlikely, even if October's report disappoints.

Additionally, geopolitical tensions in the Middle East are fueling risk aversion, enhancing the safe-haven appeal of the USD. Growing uncertainty around the upcoming U.S. presidential election could further support the USD, reviving the so-called 'Trump trade.' Looking ahead, markets will focus on the FOMC minutes and the September CPI report. With Powell's recent comments and strong jobs data, no surprises are expected in the minutes, and Powell may reaffirm the Fed’s dual mandate alongside the possibility of two more rate cuts this year. September CPI is expected to rise +0.1% M/M in September, down from +0.2%, while core CPI may ease to +0.2% from +0.3%. As the Fed shifts its focus to the labor market rather than inflation, any inflation uptick is unlikely to alter their outlook for further cuts. Overall, domestic developments and ongoing Middle East tensions are likely to support the USD for now