Dollar a little firmer

The dollar recovered some ground on Friday as a couple of Fed members sought to dampen expectations for any imminent cut in US interest rates. It still finished well done on the week against both the euro and sterling though, and kicks off this week trading at $1.092 and $1.269 respectively. Euro-sterling traded in a very narrow range last week and opens this morning at 86p.

Sovereign bond yields headed south as the market priced in deeper cuts in interest rates next year than previously expected following the latest round of central bank meetings, with 2- and 10-yields falling sharply last week. Stocks also advanced with the S&P 500 adding around 2.5%.

Fed member Williams said on Friday that the central bank “isn’t really talking about rate cuts right now”, adding that it’s “premature to be even thinking” about beginning to lower rates in March, while his colleague Bostic said the first rate cuts could come “sometime in the third quarter” of next year, which is much later than the market currently expects.

The weak state of the Euro area economy will keep alive expectations for rate cuts in the zone. The latest PMI data published on Friday suggest the economy contracted again in the final quarter of this year, with the Composite index falling back in December and remaining below the key 50 level for a seventh consecutive month.

Economic data for the week ahead include CPI inflation and retail sales in the UK on Wednesday and Friday respectively, with PCE inflation and consumer spending in the US on Friday as well. Meanwhile, the Bank of Japan announces its latest monetary policy decision tomorrow (Tuesday).