Dollar continues to drift lower

The dollar remains under pressure ahead of the outcome of this week’s Fed meeting with the market continuing to raise the chances of a 50bps cut in interest rates (now seen as almost 50/50). The euro and sterling have strengthened to around $1.1125 and $1.3210 respectively against the US currency, not far off last month’s 2024 highs of $1.12 and $1.3265, leaving EURGBP marginally lower at around £0.8420. Retail sales and industrial production are both due in the US today, the last main data releases before the Fed announcement, with the former probably having the most potential to have an impact on markets.

Government bond yields continued to nudge down yesterday with benchmark US 10-year yields closing almost 5bps lower at 3.62% (which is down some 110bps from their 2024 high in late April). In equity markets, European stocks ended slightly lower on the day while the S&P 500 in the US gained around 0.3% leaving it within a whisker of mid July’s all-time high.

In a speech yesterday, ECB Chief Economist Philip Lane said “a gradual approach to dialling back (monetary policy) restrictiveness will be appropriate if the incoming data are in line with the baseline projection,” suggesting the next cut in interest rates is most likely to come in December (the market currently sees about a 33% chance of a move at the ECB’s penultimate meeting of the year in October).

As mentioned, retail sales and industrial production data are due in the US today, while it is quiet enough elsewhere, with the ZEW Index of Economic Sentiment in Germany the only other release of note.