Dollar on the back foot
The dollar remains on the back foot post Trump’s latest tariff threat, weakening somewhat further in overnight trading. The euro and sterling have extended their gains against the US currency, to around $1.17 and $1.3480 respectively, both now up around 1% from Friday’s closing levels. Positive news out of France, where it looks like a budget for 2026 will be adopted, is also supporting the euro at the margin, while this morning’s labour market data in the UK were broadly in line with expectations, helping to underpin the pound. This all leaves EURGBP little changed from yesterday morning at about £0.8680.
European equity markets took a hit from Trump’s threats. The Euro Stoxx 50 fell by 1.7% yesterday and is down another 0.75% in early trading this morning. According to the futures market, the S&P 500 is set to open a good deal lower later today when US (equity and bond) markets get back into the swing of things following yesterday’s public holiday. In government bond markets, long-dated Japanese yields have spiked sharply higher again overnight with 10-year yields up another 10bps or so and 30-year yields rising by a massive 27bps. This is spilling over to a limited extent to US and European markets – US 10-year yields have risen by 6bps overnight while equivalent German and UK yields are up 4-5bps.
The latest labour market report in the UK shows employment on the Labour Force Survey measure edged up in the three months to November (versus the three months to August), increasing by 82k, or 0.2%, though separate HRMC data shows a continuing decline in the number of payroll employees in December. The unemployment rate held steady at 5.1% in September-November (versus August-October), while the annual rate of growth in private sector regular weekly earnings – which the Bank of England MPC is watching closely to gauge disinflation pressures in the economy – fell to 3.6%, the weakest pace of increase since late 2020. This keeps intact the prospect of further interest rate cuts this year.
Looking to the day ahead, markets will be watching closely for any Greenland-related headlines coming out of the Davos economic summit. Economic data due include Euro area construction output and the German Zew investor sentiment survey, while the weekly ADP employment report is scheduled in the US.