Euro steady against dollar

Quiet day again yesterday with not much change in the main currency pairs. The euro has made a sizable move up last week against the dollar but appears now to be levelling off at above $1.09 at the start of this week. Against sterling, the single currency was up just a fraction but remains in a fairly tight 85p range. The GBPUSD cross saw the dollar move up but, again, just a touch and is trading at just above $1.2750.

Government bond yields reversed their recent upward trend with falls in yields yesterday in European bonds. 10-year German bund yields were down 10bps to 2.4% while 10-year UK gilt yields were down 15bps to 4.3%. US yields were less impacted and fell just a few bps to just above 3.7%. However, rates are heading back upwards this morning, particularly in the UK following an small upside ‘surprise’ in May’s inflation data.

With bond yields on the slide, it was a generally risk off environment yesterday and that saw equities take a dip on both sides of the Atlantic. The S&P 500 lost 0.5% for the day while the Eurostoxx took a similar loss but the fall in the FTSE was a little smaller, down about a ¼ of a percent.

The headline annual rate of UK CPI inflation was unchanged in May at 8.7%, when a reduction in the rate was expected. While the headline rate has come down a bit recently and is benefiting now from weaker energy prices, the rate remains way above the BoE’s target rate of 2%, and possibly of even more concern is the fact the annual rate of core inflation increased to 7.1% last month from 6.8% in April. With core inflation heading in the wrong direction the BOE have even more evidence to support a 25bps hike at tomorrow’s MPC meeting.

Bank of France Governor Villeroy was out to say he believes the ECB hike cycle is close to complete. He said ‘we have done most of the path’ and ‘additional increase depend on inflation data observed’. He suggested that with a transmission lag of around two years, previous increases by the Governing Council will bring inflation back to target by 2025 or late 2024.

On the agenda today, not much by way of data releases but Fed Chair Powell begins his testimony to Congress