Consolidation in currency markets

It was mainly a case of consolidation in currency markets yesterday after the sharp enough moves seen at the end of last week and the start of this week. The euro and sterling are both a little firmer against the dollar overnight though and are trading at around $1.0780 and back above $1.26 respectively this morning, leaving EURGBP a touch lower at £0.8530.

There was some respite for bonds yesterday with yields falling back a little having spiked higher over the previous two trading sessions. Equity markets, meanwhile, continue to be quite resilient with European stocks advancing by almost 1% and US indices chalking up modest gains.

Fed member Mester says “it would be a mistake to move (interest) rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%”, but she does expect the central bank to begin lowering them “later this year”.

ECB’s Schnabel has also cautioned against cutting rates “soon”, saying sticky services inflation, a resilient labour market, looser financial conditions and tensions in the Red Sea “means we must be patient…because we know also from historical experience that inflation can flare up again”.

The latest ECB survey of consumer inflation expectations was a mixed bag. Median expectations for inflation over the next 12 months declined to 3.2% from 3.5%  – their lowest level since February 2022 – but those for inflation 3 years ahead increased slightly to 2.5% from 2.4%.

House prices in the UK rose at the start of 2024 according to the Halifax index, increasing by 1.3% in January to leave them 2.5% higher than a year ago. Halifax notes that “the recent reduction of mortgage rates from lenders as competition picks up, alongside fading inflationary pressures and a still-resilient labor market has contributed to increased confidence among buyers and sellers.”

Economic data are thin enough on the ground today with the trade balance and consumer credit due in the US, while a raft of Fed members are scheduled to speak.