Dollar a touch softer

The euro closed out last week at $1.0270 against the dollar, up slightly from the previous Friday’s close, while sterling shed a half a cent to finish at $1.2170, with EURGBP about half a penny stronger on the week just shy of £0.8450. They are both a little firmer against the US currency this morning, at $1.0310 and $1.2205 respectively, amid reports of a positive phone call between Donald Trump and China’s President over the weekend and ahead of the former’s inauguration later today. Trump’s first days in office will command market attention, while the economic data calendar is relatively light for the week ahead.

Bond yields fell last week amid softer than expected inflation data and some firming of central bank rate cut expectations. UK 2- and 10-year yields fell by about 15bps and 20bps respectively and equivalent US yields were  around 10 and 15bps lower, while German 2- and 10-year yields both fell by 6bps.

Equity markets ended the week on a positive note. The S&P 500 added 1% on Friday and almost 3% on the week (its first weekly gain since early December), while European stocks also rose by around 1% on Friday for a weekly gain of almost 3.5%.

ECB member Schnabel says “we currently see no major risks that could prevent us from reaching our 2% inflation target (therefore) we will probably be able to lower interest rates further,” but cautions that “after the steep rate cuts over the last few months, we are getting closer and closer to the point where we have to take a closer look at whether and to what extent we can still reduce rates.”

In terms of economic data scheduled for the week ahead, the main releases are the labour market report for September-November in the UK tomorrow (Tuesday) and flash PMIs for January in the main economies on Friday. The Fed is in its “quiet period” ahead of next week’s monetary policy meeting, as will the ECB from this Thursday.