Dollar back in the ascendency

The dollar was back in the ascendency yesterday helped by stronger than expected US economic data, which also contributed to some slight paring back of already modest Fed rate cut expectations and higher bond yields. The euro and sterling are both down almost a cent from yesterday morning’s levels against the US currency, trading at about $1.0330 and $1.2460 this morning. EURGBP remains range-bound and is hovering just below £0.83.

Higher US bond yields occurred mostly at the longer-end of the curve with the benchmark 10-year yield increasing by around 6bps to just shy of 4.70% (close to its highest level since April 2024), while equivalent German and UK yields followed suit. Higher bond yields seemed to weigh on US equities, with the S&P 500 selling off into the close to end more than 1% lower on the day.

Regarding the US economic data, the ISM index of services activity rose by more than expected in December and was comfortably in expansionary territory (at 54.1), pointing to solid growth in this sector of the economy.  The prices paid component of the ISM report – which measures prices paid by businesses for materials and services – rose sharply to its highest level since early 2023, adding to inflation concerns. Meanwhile in the labour market, the number of job openings in November was higher than expected, rising for a second month in a row, pointing to healthy labour demand.

Yesterday’s Euro area inflation data for December matched forecasts. Headline inflation rose to 2.4% from 2.2% in November, while core inflation was unchanged at 2.7%. Within core, goods inflation nudged down to 0.5% and services inflation nudged up to 4%. The ECB still has concerns about still elevated services inflation, but that isn’t expected to deter it from cutting interest rates again at the end of this month.

Looking to the day ahead, economic data due includes the Euro area Economic Sentiment Indictor for December and producer prices for November as well as weekly jobless claims and the ADP employment report (December) in the US. The Fed publishes the minutes of last month’s monetary policy meeting, at which it cut rates for a third time but said it would adopt a cautious approach regarding “the timing and extent” of future reductions.