Dollar a little lower after inflation data
Yesterday’s consumer price inflation data in the US were broadly in line with the consensus forecast, copper-fastening market expectations for a Fed rate cut next week and propelling US stocks to new record highs. The ECB remained on hold, as widely anticipated, and said risks to economic growth have become more balanced while also revising up a touch its forecasts for inflation in 2025-2026, prompting the market to pare back the chances of any further reduction in the deposit rate. The main currency pairs weren’t much changed on the day with the dollar a little weaker. The euro and sterling are trading at around $1.1740 and $1.3560 against the US currency this morning, versus Wednesday’s closing levels of $1.1695 and $1.3530 respectively, while EURGPB continues to hover in and around £0.8650.
US long-dated government bond yields edged lower following the inflation data with 10-and 30-year yields ending down around 3-5bps, while 2-year yields were largely unchanged (at about 3.50% they are already well below the current Fed policy rate of 4.25%-4.50%). German 2-year yields nudged up following the ECB meeting, closing around 3bps higher, while yields further out the curve were flat to slightly lower. UK yields were marginally lower across the curve. In equity markets, US stocks rallied strongly post the inflation day, chalking up gains of 0.7% to 1.4% for the day – with the Dow Jones, S&P 500 and Nasdaq all closing at record highs – while European stocks also chalked up solid gains of around 0.8%.
Yesterday’s CPI inflation data in the US were broadly in line with expectations. Headline consumer prices rose by 0.4% in August, pushing the annual rate of inflation up to 2.9% from 2.7% in July. Core consumer prices (excluding energy and food prices) rose by 0.3% on the month, leaving the core rate of inflation unchanged at 3.1%. Core goods inflation accelerated to 1.2% from 0.7% in July, reflecting the impact of higher tariffs, while core services inflation was unchanged at 3.6%.
The ECB left the deposit rate at 2% for a second consecutive meeting, as widely anticipated. It revised up slightly its forecasts for inflation in 2025 and 2026, to 2.1% and 1.7% respectively, and said risks to economic growth “have become more balanced”. ECB president Christine Lagarde also said the central bank is “in a good place” (with) inflation where we want it to be…the domestic economy showing resilience…and the labour market solid”, all of which would point to unchanged interest rates in the period ahead.
GDP data released in the UK a short while ago were in line with expectations. The economy was flat in July, with GDP recording 0% growth, with increases in services and construction output offset be a decline in industry output, while growth over the three months to July was 0.2%, down from 0.8% over the three months to April (the opening months of this year were boosted by a front-running of economic activity ahead of expected US tariffs).
It is a quiet day ahead in terms of economic data, with the University of Michigan’s latest (September) survey of consumer confidence/inflation expectations in the US the only release of note.