Euro on the back foot

The euro has given up some ground against the dollar following the latest round of inflation data in the Euro area and US, shedding more than half a cent to trade at around $1.09 this morning. Sterling also weakened against the US currency during yesterday’s session but is slightly firmer this morning at $1.2650, leaving it trading at about 86p to the euro.

The inflation data copper-fastened market expectations that both the ECB and Fed will begin lowering interest rates relatively early next year, though sovereign bond yields still edged higher yesterday, reversing some of the fall seen earlier in the week. In equity markets, European and US stocks ended in positive territory, rounding off what was a strong month overall.

Headline inflation in the Euro area fell to 2.4% in November from 2.9% in October according to the flash reading, its lowest level since July 2021. Significantly, most of the decline in the headline rate was accounted for by lower core inflation (excluding energy and food prices), which fell to 3.6% (from 4.2%) with core goods and core services inflation both falling further in November.

The inflation data in the US also brought positive news, with the headline and core rates of PCE inflation falling to 3.0% and 3.5% respectively in October. The decline in both has accelerated this year, with the former down from 5.4% at the end of 2022 and the latter down from 4.9% over the same period.

House prices in the UK recovered further in November according to the Nationwide measure, increasing by 0.2% from October and reducing the annual rate of decline to 2%. This follows Bank of England data earlier in the week showing mortgage approvals rebounding in October, having fallen in each of the previous three months.

Economic data due today include final manufacturing PMI readings for October in the main economies and the ISM manufacturing index – also for October – in the US, while Quarterly National Accounts data for Q3 are published in Ireland.