Dollar off its highs
Weaker than expected Euro area and UK Purchasing Managers’ data (PMIs) on Friday morning saw the euro and sterling slide further against the dollar, hitting intra-day lows of about $1.0335 and $1.2480 respectively before recovering some ground. Both have popped almost half a cent higher from Friday’s close at the start of play today, to around $1.0460 and $1.2560, following US president-elect Donald Trump’s appointment of his Treasury Secretary (Scott Bessent), who is seen as a budget ‘hawk’ and therefore the new administration’s fiscal policy might be less expansionary and inflationary (US bond yields are also lower this morning). EURGBP is trading at £0.8330 this morning, having briefly hit a low of £0.8260 during Friday’s session.
German 2-year bond yields fell sharply following the soft Euro area PMI data, closing around 12bps lower on Friday, as expectations for ECB rate cuts hardened even more, with the market now pricing in almost 75bps worth of cuts over the next two meetings in December and January. Equivalent UK yields also fell, by around 6bps, on the back of the weak (UK) PMI data and some modest firming of BoE rate cut expectations, with the market now close to fully pricing in a 25bps reduction at the next but one meeting in February. US 2-year yields finished marginally higher on Friday, but as indicated above, yields are lower across the curve this morning, led by long-dated yields which are down around 6-7bps.
The latest Purchasing Managers’ data for the Euro area suggest economic activity contracted in November, with the composite PMI falling to 48.0 from 50.0 in October and the services index slipping below the key 50 level. The composite PMI for the UK fell to 49.9 (from 51.8 in October), suggesting the economy stagnated this month, while the equivalent index for the US rose to 55.3, pointing to continued solid growth in economic activity.
ECB Chief Economist Philip Lane says that, while the central bank isn’t “committing…in advance to a precise pace of reduction” (in interest rates), it “will have to gradually reduce rates,” noting that “monetary policy shouldn’t remain restrictive for too long, otherwise the economy won’t grow sufficiently and inflation will fall below target.”
It is relatively quiet on the economic data front this week. Wednesday sees the release of PCE inflation for October in the US, while on Friday there’s a flash reading for Euro area inflation in November. The Fed publishes the minutes of its October monetary policy meeting on tomorrow (Tuesday), while there are a number of ECB and BoE members scheduled to speak over the course of the week.