A softer dollar
Donald Trump’s tariff retreat did little to support the dollar which was softer across the board yesterday notwithstanding a batch of solid US economic data. It has now given up almost all of the gains it made against the euro over the first couple of weeks of the new year, trading at around $1.1730, and has slipped to just shy of $1.35 vis-a-vis sterling. EURGBP is a touch weaker this morning, hovering around the £0.87 level.
US equity markets built on Wednesday’s post-Trump retreat gains with the main indices adding between 0.5% and 1%, while European markets closed around 1% higher on the day. There was little enough movement in bond markets with US and German short-dated yields a little higher but yields out the curve flat to slightly lower (the opposite was the case for UK bonds).
GDP growth in the US in Q3 2025 was revised up a touch with the economy expanding by 1.1% in the quarter, while consumer spending posted slightly stronger than expected gains in October (+0.1% m/m) and November (+0.3% m/m). Meanwhile, headline and core PCE inflation in November were in line with expectations at 2.8% for both, versus 2.7% for both in October. Core goods inflation nudged up 1.3%, while services inflation was unchanged at 3.3%. The latter has fallen from 4% in November 2024, offsetting a (mainly tariff-induced) rise in core goods inflation, leaving core inflation overall a little lower over this period.
Retail sales volumes in the UK were firmer than expected in December according to data released a short while ago, increasing by 0.4% on the month following a fall of 0.1% in November. Volumes declined in Q4 overall though, by 0.3% versus the third quarter of the year (albeit they were up 2.1% on Q4 2024), which will have weighed a little on GDP growth in the final quarter of last year.
The minutes of the ECB’s December meeting noted that ‘it was important for the Governing council to maintain full optionality in either direction’ as far as inters rates are concerned, though some members suggested ‘an extended period of stable rates’ is likely with inflation expected to remain close to its 2% target.
Looking to the day ahead, the main economic data scheduled for release are the flash PMIs for January in the Euro area, UK and US, while a final University of Michigan consumer confidence reading for January is due in the US also.