Dollar a touch weaker
The euro and sterling are both a touch firmer against the dollar this morning, trading at around $1.0780 and $1.2940 respectively, while EURGBP is not much changed at £0.8330. The pound has performed relatively well this week – it’s ahead against both the euro and the dollar – helped by a paring back of UK rate cut expectations since last week’s Bank of England meeting. Very much in contrast, ECB rate cut expectations have firmed quite notably with the market believing it’s now most likely the central bank will cut rates again at next month’s meeting (April 17th), which takes place shortly after the US is expected to impose widely discussed tariffs on the EU (April 2nd).
Elsewhere in markets, UK 10-year bond yields rose yesterday, more than reversing Wednesday’s fall following soft inflation data, though 2-year yields ended marginally lower. US yields were similarly mixed, with 2-year yields a touch lower but 10-year yields a little higher, while German yields fell across the curve led by a decline in 2-year yields (of circa 6bps). Meanwhile, equity markets headed further south, as they continue to be unnerved by Trump’s tariffs, though losses across US and European stocks were relatively modest at around half a percent.
This morning’s retail sales data out of the UK were much stronger than expected with volumes rising by a further 1% in February following an increase of almost 1.5% in January. This still though left sales volumes in the three months to February up just 0.3% compared with the three months to November, reflecting a sizeable decline in retail spending over the final months of last year.
The ECB is closely watching private sector credit data to see how lower interest rates are transmitting to lending in the economy and to attempt to gauge the restrictiveness of monetary policy. In this regard, its latest data shows year-on-year lending growth to both businesses and households picked up further in February to 2.2% and 1.5% respectively (from 2% and 1.3% in January). This pace of growth though is still quite subdued relative to the 2017-2019 period, when it averaged closer to 3% and the economy expanded by around 2% a year on average.
Looking to the day ahead, economic data include the Euro area Economic Sentiment Indicator (for March) and the ECB’s latest survey of consumer inflation expectations, while consumer spending and PCE inflation are due in the US. In relation to the US inflation data, both headline and core prices are expected to have increased by 0.3% in February, which would leave the annual rate of headline inflation unchanged at 2.5% but push the core rate up to 2.7% from 2.6% in January.