Dollar takes back a little ground this morning
Dollar weakness continued to outweigh weak European data to push EURUSD to year-to-date highs around $1.12 on Friday afternoon, however we open this morning back below this level at $1.1160 ahead of key data releases in both the Euro Area and the US this week. EURGBP reached a year-to-date low of £0.8325 late last week, a level last seen in April 2022, as quiet calendars and hawkish BoE commentary supported the pound and trades this morning a little higher at £0.8340. This in turn saw GBPUSD hit new year-to-date highs of $1.34, last reached in Q1 2022, and the pair is trading this morning at $1.3380.
There was a notable decline in German bond yields last week as the market raised the chances of an interest rate cut at next month’s ECB meeting – now seen at about 80% – following a string of weaker than expected Euro area economic data, with 2- and 10-year yields falling by around 15bps and 8bps respectively. Equivalent US and UK yields, in contrast, ended flat to higher on the week. In equity markets, European stocks had a very positive week, rising by around 4%, while US indices posted more modest gains.
Friday’s PCE inflation in the US showed headline and core prices both rose very modestly in August, by just 0.1% from July. This resulted in the annual rate of headline inflation falling to 2.2% (from 2.5%), its lowest level since early 2021, but the core inflation rate nudging up to 2.7% (from 2.6%). The latter had been well flagged by the Fed though, so won’t have come as a surprise to it at all.
Economic confidence in the Euro area slipped this month according to the European Commission’s Economic Sentiment Indicator, dragged down by deteriorating sentiment in industry sector which offset improving confidence amongst services sector firms. Meanwhile, the latest ECB survey of consumer inflation expectation showed a slight fall in both 1- and 3-year ahead expectations in August, to 2.7% and 2.3% respectively from 2.8% and 2.4% in July.
Looking to the week ahead, two economic data releases stand out, namely Euro area CPI inflation tomorrow and US non-farm payrolls on Friday, both for September. In relation to Euro area inflation, the consensus expects the headline rate to fall to 2.0% – in line with the ECB’s target – from 2.2% in August, while the core rate is expected to remain at 2.8%. Regarding the payrolls report, jobs growth of 140k is forecast for this month, the same as in August, with the unemployment rate expected to remain at 4.2% and y-oy hourly earnings growth seen easing to 3.7%.