Dollar a touch softer

The euro and sterling are both a touch firmer against the dollar with some ‘dovish’ Fed commentary weighing a little on the latter. The single currency is trading just north of $1.12 this morning versus a 2026 to date low of about $1.1150 earlier in the week, while sterling has firmed to around $1.3270  from under $1.3250 yesterday morning. EURGBP is little changed, hovering just below £0.8450. There was some respite for French government bonds yesterday amid a decline in yields generally. This is continuing this morning with spreads over Germany narrowing further. The key economic data release today is the CPI inflation report for September in the US.

Government bond yields in the main markets took their cue from the ebb and flow of oil prices yesterday (Brent crude fluctuated between $104 and $107 a barrel) but closed slightly lower overall. French bonds outperformed with 10-year yields falling by around 6bps and spreads over equivalent German yields narrowing by a bit less than 5bps. Yields generally are lower again this morning with French spreads coming in a bit further. In equity markets, with the Q3 US corporate earnings season up and running, the main US indices ended flat to marginally lower on the day, while European stocks shed around half a percent, erasing Monday’s gains.

Fed member Williams says he expects US inflation to slow “quite a bit” next year as the impacts from tariffs and the energy price shock fade. In terms of the implications for monetary policy, he says one more interest rate hike before the end of this year may be appropriate and doesn’t think “that we would need to do more.” The IMF in its latest forecasts also sees the Fed hiking once more by year-end with rates then expected to remain on hold through to the end of 2028. The market is much more ‘bearish’, currently expecting about 75bps of hikes in total over the next 12-15 months.

For the day ahead, as mentioned, the key economic data release is the CPI inflation report for September in the US. According to the consensus forecast, both headline and core inflation are  expected to have nudged up last month, to 3.6% and 2.5% respectively from 3.4% and 2.4% in August. The Fed publishes its lates Beige Book, while a number of Fed, ECB and Bank of England members are due to speak over the course of the day.