Dollar firmer this morning

The ECB left interest rates unchanged yesterday, as expected, and seems set to remain on hold for an extended period. The Bank of England cut rates by 25bps but expressed caution about further reductions. Inflation in the US came in much lower than expected in November but may have been biased down because of issues stemming from the recent government shutdown. Overnight,  the Bank of Japan raised rates by 25bps but further hikes may be slow to come about. The dollar has popped higher against the yen, to just shy of Y157, and is also a touch firmer against the euro and sterling at around $1.1710 and $1.3370 respectively. The pound has gained a little ground against the single currency, trading at about £0.8750.

In government bond markets, UK short-dated yields moved up by around 4bps following the Bank of England’s ‘cautious cut’ but were unchanged further out the curve. US yields ended slightly lower (down 2-3bps), while German yields were largely unchanged. Equity markets rebounded, with the lower than expected US inflation readings seemingly the excuse to rally, with US and European stock gaining in and around 1% on the day.

The Bank of England MPC voted 5/4 to lower the policy rate by 25bps to 3.75%, bringing the cumulative reduction in the cutting cycle to date to 150bps. It said disinflation was likely to continue and, hence, the policy rate is likely to “continue on a gradual downward path”, but noted that further policy easing from here “will become a closer call.”. The market sees another 25bps cut coming around next April.

The ECB left the deposit rate unchanged at 2% for a fourth consecutive meeting, as widely expected, while raising its forecasts for both growth and inflation. The latter is seen running close to the 2% target in 2026-2028, which points to the ECB remaining on hold for an extended period.

Taken at face value, yesterday’s inflation data in the US were very benign with headline and core inflation coming in at 2.7% and 2.6% respectively in November versus 3% for both in September. Within core, goods inflation was 1.4% (versus 1.5% in September), while services inflation was running at a circa four-year low of 3%.

For today, we’ve already had retail sales in the UK, which were softer than expected with volumes down 0.1% in November after falling by 0.9% in October. Data is light for the rest of the day, with consumer confidence due in the US and Euro area.