Sterling gains ground

Sterling advanced against both the dollar and the euro yesterday and is largely holding onto these gains following the release a short while ago of the latest labour market report in the UK – which was broadly in line with expectations – trading at about $1.2620 and £0.83 respectively. The euro has drifted a little lower against the dollar, retreating from Friday’s high of over $1.05, and is trading at about $1.0465 this morning.

European bond yields and equity markets both rose yesterday, with the prospect of increased defence spending by EU governments contributing to both. German 10-year yields rose by 6bps, while equivalent yields in the UK increased by 4bps, with both nudging higher again at the start of play today. European equity markets advanced by around 0.5%, adding to last week’s gains. (US bond and equity markets were closed for a public holiday yesterday).

This morning’s labour market data in the UK showed employment rose by 0.3% (or +107k) q-o-q in the final quarter of 2024 according to the Labour Force Survey, though the unemployment rate nudged up to 4.4% (from 4.3% in Q3) largely reflecting a further decline in the inactivity rate. The annual rate of growth in regular average weekly earnings picked up in the three months to December, to 5.9%, a full percentage point higher than in the three months to September. The strength in earnings growth will not be a surprise to the Bank of England, but it does leave it in an uncomfortable position as it contemplates further reductions in interest rates.

Fed member Waller says “inflation is still meaningfully above our target, and progress (in lowering it) has been excruciatingly slow over the last year”, hence it is “appropriate to pause rate cuts” and maintain a restrictive monetary policy stance for now.

It is relatively quiet in terms of economic data for the rest of the day, with the ZEW Index of investor sentiment due in the Euro area and the latest housing market index due in the US. A number of Fed/ECB members are scheduled to speak over the course of the day.